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Chile Increases Rate to 2% as Growth Boosts Prices

Aug. 12 (Bloomberg) -- Chilean policy makers raised the overnight interest rate for the third straight month as the economy’s recovery fuels concern that consumer price increases this year may exceed central bank targets.

The five-member policy board, led by bank President Jose De Gregorio, raised the benchmark rate to 2 percent today from 1.5 percent, matching the forecast of all except two of 22 economists surveyed by Bloomberg. One economist predicted a quarter-point rise and one an increase to 2.25 percent.

Increases in domestic demand and public and private investment are fueling Chile’s economic recovery from February’s 8.8-magnitude earthquake and last year’s recession, pushing consumer prices up, said Cesar Perez, an economist at Celfin Capital SA. Policy makers will probably raise rates by a quarter-point at each of the next four meetings to keep pace with inflation, he said.

“Inflation is picking up and it’s picking up fast,” Perez said from Santiago. “If policy makers don’t move as fast as inflation is rising, they’re going to fall behind and it’s going to take a greater increase in the future.”

Activity and demand data have shown the economy is doing better than previously expected, the central bank said in a statement accompanying its decision. The bank predicted in June that Chile’s economy would grow 4 percent to 5 percent in 2010.

“Domestically, available data show significant output and demand dynamism, beyond what was foreseen in the latest Monetary Policy Report,” policy makers said.

Consumer Prices

Chile’s consumer prices rose 0.6 percent in July from June -- the fastest monthly rate in 10 months -- and the annual inflation rate nearly doubled to 2.3 percent from the 1.2 percent rate in June. Policy makers said in today’s statement July’s monthly consumer price increase was due primarily to “transitory phenomena.”

Economists expect prices to rise 0.4 percent in August from July and 3.6 percent on an annual basis in December, according to a monthly central bank survey published Aug. 10. The bank targets inflation of 3 percent, plus or minus 1 percentage point.

Policy makers in July 2009 responded to a recession and deflation by cutting borrowing costs to 0.5 percent. The bank kept rates at the record-low level until June, when the economy showed signs of recovering from the Feb. 27 earthquake.

Managing Recovery

The central bank said June 7 that the economy grew 4.6 percent in April from a year earlier, double the median forecast of 10 economists surveyed by Bloomberg.

Since then, the annual pace of economic growth has quickened, exceeding the median forecasts of economists surveyed by Bloomberg. Gross domestic product expanded 7.1 percent in May and 6.8 percent in June.

Second-quarter data on the economy suggest Chile is nearly fully recovered from the February temblor, central bank economists said in a note to policy makers published yesterday.

The peso has gained 7.1 percent since June 30, the fourth-best performance against the dollar among 26 emerging market currencies tracked by Bloomberg. Today it rose 0.5 percent to 509.75 per dollar.

Chile may lead Latin America’s economic growth with a 6 percent expansion in 2011 after growing 4.3 percent this year, the United Nations’ economic unit for the region said in a July 21 report.

Growth, Neutral Policy

Chile still has the lowest benchmark rate of any major Latin American economy, according to Bloomberg data. “The board will continue to reduce the current significant monetary policy stimulus at a pace that will depend on the unfolding of domestic and external macroeconomic conditions,” policy makers said in today’s statement.

The decision to push the benchmark down to 0.5 percent would have been more appropriate for the U.S. or Europe where the financial system was vulnerable during the crisis, Alejandro Fernandez, director of studies at Santiago-based consulting company Gemines Consultores, said in an interview.

“That wasn’t the case here in Chile,” he said in Santiago. “I was never in very much agreement with reducing the interest rate as much as they did.”

The central bank’s decision to raise by a half-point today shows policy makers recognize lending costs are “excessively expansive,” Alejandro Puente, an economist at Banco Bilbao Vizcaya Argentaria SA in Santiago, said.

“The market would have interpreted an increase of less than 0.50 percentage point as a signal that rates are reaching an adequate level, which isn’t correct given the level of internal demand and the inflation expectations we’re seeing,” he said in a telephone interview.

Internal Demand

Private consumption is driving internal demand as the job market improves and Chileans feel more optimistic about the economy, Juan Pablo Castro, an economist at Banco Santander SA in Santiago, said in an interview.

Chile’s unemployment rate slid to 8.5 percent in the three months through June from 8.8 percent through May, the statistics institute said. Retail sales increased 18 percent in June, 19 percent in May and 22 percent in April from the previous year, the institute said.

That rate of consumer spending isn’t sustainable and will slow after consumers and companies stop replacing items destroyed in the February earthquake, Puente said.

To contact the reporter on this story: Randy Woods in Santiago at

To contact the editor responsible for this story: Joshua Goodman at

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