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Chile Rate Likely to Hold as Attention Shifts to Peso Rally

Chilean policy makers may express concern about the strength of the peso today, presaging a possible program of dollar purchases, while keeping the benchmark interest rate unchanged for a seventh month.

The peso is the world’s best-performing currency tracked by Bloomberg this year behind Hungary’s forint. Chile’s 5 percent interest rate has made the peso the third-most profitable bet this year for investors who borrow in dollars to invest in other currencies, according to data compiled by Bloomberg.

All 17 analysts polled by Bloomberg forecast the bank to leave the key rate at 5 percent, which along with Colombia’s is the highest borrowing cost among major Latin American rate- setting nations behind Brazil. The decision will be announced after 6 p.m. in Santiago. Chile lacks room to cut rates with an economy growing faster than 5 percent, rising salaries and falling unemployment, economist Felipe Alarcon said.

“You have to be very attentive to the language in the communique,” said Banco de Credito e Inversiones (BCI)’ Alarcon, who used to run the market desk at the central bank. “Nothing suggests they will cut rates, but they may add a mention of the real exchange rate. It hasn’t been a year since the last intervention and already we’re back at similar levels.”

Policy makers last intervened in the currency market in January 2011 when the peso reached 465.75 to the dollar, with the bank buying $50 million a day for 12 months. The peso was little changed at 483.05 a dollar as of 10:35 a.m. from Aug. 14 when markets were last open.

Flexibility

Policy makers started mentioning the peso’s gains almost four months before initiating dollar purchases when they noted the appreciation of the peso in a Sept. 16, 2010 statement accompanying the rate decision. They haven’t mentioned the peso in a statement since Jan. 12 this year, when they said its depreciation in the fourth quarter was impacting inflation.

Asked about the peso during an economic forum in Santiago this month, central bank President Rodrigo Vergara kept open his options.

“We have a flexible exchange rate, which we think is optimal for a country like Chile so it can absorb shocks that come from abroad,” he said Aug. 7. “That doesn’t mean that we reject the possibility of intervening when we think the exchange rate moves away from its fundamentals.”

In a trade-weighted and inflation-adjusted index, the peso has reached 72, according to BCI, compared with 73 before the previous intervention in January 2011.

Under Pressure

The central bank already is under pressure to take measures to soften the peso.

Chile’s fruit lobby, known as Fedefruta, has met with officials at the Economy Ministry as well as lawmakers and will set up meetings at the central bank to express its concern that the peso’s appreciation threatens to make exports of some fruits unprofitable, Fedefruta President Cristian Allendes said on Aug. 10.

“This country needs to develop its exports, and not just in areas related to mining,” Allendes said by phone. “We are very worried about the peso’s appreciation, especially considering that we’ve seen an increase in costs in terms of salaries and energy. We’re in a tough situation.”

The Santiago Chamber of Commerce in July urged the central bank to consider lowering borrowing costs, saying high local interest rates had attracted funds that were pushing up the peso, according to an e-mailed statement.

Policy makers will reduce borrowing costs by February as inflation rates remain at or below the central bank’s 3 percent target for the next two years, according to the median estimate of 55 traders and investors polled by the bank on Aug. 7. Inflation has eased in the past five months, reaching 2.5 percent in July, the lowest level in 20 months.

Consumer Boom

Slowing inflation has been accompanied by surging economic growth in the world’s top copper producer as rising wages and falling unemployment push up consumer spending. Copper traded at $3.36 a pound yesterday, down 3 percent this year.

The economy expanded 6.2 percent in June from last year after growing 5.3 percent in May and 4.8 percent in April. Wages increased 6 percent in June and unemployment dropped to 6.6 percent in the second quarter from 7.2 percent in the year-ago period.

Still, growth will moderate in the second half of 2012 as a global deceleration reduces demand for Chilean exports, with gross domestic product in the Andean nation expanding 4 percent to 5 percent this year from 6 percent in 2011, according to central bank forecasts.

“There are major risks and we must remain vigilant,” Vergara said Aug. 7. “The effects of the external environment on activity have been limited and less than expected. But it’s impossible for us to remain an island if the situation worsens.”

To contact the reporters on this story: Randall Woods in Santiago at rwoods13@bloomberg.net; Sebastian Boyd in Santiago at sboyd9@bloomberg.net

To contact the editor responsible for this story: Philip Sanders at psanders@bloomberg.net

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