Chile May Hold Rate at Two-Year High After Inflation Slows

Chile’s central bank probably will keep its benchmark interest rate unchanged for the first time since January after consumer prices rose less than expected last month on slowing domestic demand and a stronger currency.

The five-member board, led by bank President Jose De Gregorio, will hold the benchmark rate at 5.25 percent today, according to 20 of 24 economists surveyed by Bloomberg. Four analysts forecast policy maker will raise borrowing costs by a quarter point to 5.50 percent, the 13th increase in 14 months.

The highest interest rates in more than two years have helped rein in job growth and consumer spending in South America’s fifth-biggest economy, prompting the central bank last month to cut its annual inflation forecast to 4 percent, the upper limit of its target range.

“All the short-run economic indicators we’ve seen at the local and international level without exception point to a stall and even a reversal in inflationary pressures,” said Jorge Selaive, chief economist at Santiago-based Banco de Credito e Inversiones, Chile’s fourth-largest lender. “It’s important to stop and look at the contribution that the recent rate increases are having and will have.”

After keeping the benchmark rate at a record low 0.5 percent for almost a year to help pull the $200 billion economy out of recession, policy makers since June 2010 have raised borrowing costs by 4.75 percentage points. In 2011, Chile has boosted lending rates faster than any other major interest rate-setting economy tracked by Bloomberg except Belarus.

Wages, Jobs, Peso

After holding at 5.25 percent today, policy makers will raise the benchmark rate to 5.5 percent in August and 5.75 percent by year-end, according to the median estimate of 65 economists in a monthly central bank survey published July 12.

Annual inflation will end 2011 at 4 percent, according to the survey, which matches the central bank forecast published June 20. The bank, whose target range is 2 percent to 4 percent, cut its 2011 forecast from 4.3 percent in April.

Since June 14, when policy makers last met, two-year breakeven inflation, which reflects views of average price increases, has declined 35 basis points to 3.21 percent at 11:33 a.m. New York time.

Inflation forecasts have declined because of higher interest rates, government efforts to cut planned spending by 0.4 percent of gross domestic product and a decrease in global price pressures, according to Finance Minister Felipe Larrain, a non-voting member of the central bank board.

“The news since the last monetary policy meeting indicates inflationary pressures are falling,” Selaive said. “We’ve had a decline in salary growth, a decline in the rate of job creation, a decline in retail sales growth and a major appreciation of the exchange rate.”

‘Space for Pauses’

Consumer prices climbed 0.2 percent in June, the national statistics agency said July 8, lower than the 0.3 percent median estimate of 15 analysts surveyed by Bloomberg, and half the 0.4 percent pace recorded in May. Prices rose 0.8 percent in March.

“With these lower-than-estimated increases, and as inflation expectations moderate, there could be space for pauses,” Larrain told reporters after the report. “My personal vision is that we’re very close to the end of the process of returning the monetary policy rate to normal.”

Unemployment rose to 7.2 percent in the three months through May from 7 percent through April as salaries declined 0.1 percent in May from the previous month, the Statistics Institute reported June 30 and July 7 respectively.

Retail sales growth, which averaged 16 percent in the first quarter, decelerated to 8.7 percent in April and 8.5 percent in May from last year, the institute said June 29.


The peso has appreciated 5.8 percent against the dollar in the past six months, the third-best performance among the seven major Latin American currencies tracked by Bloomberg after Brazil’s real and Colombia’s peso. A stronger peso can reduce the price of imports.

In trading today, the currency rose 0.1 percent to 462.65 per dollar at 11:57 a.m. from 462.95 yesterday.

To be sure, the central bank eventually will raise interest rates around levels that would neither stimulate nor constrict economic growth and consumer prices, De Gregorio told senators on June 20.

“Monetary policy must be located around its neutral level,” De Gregorio said in prepared remarks. “The best advice is to continue removing the monetary stimulus. The timing of such changes will have to be revised meeting to meeting, including pauses to evaluate the effects of the adjustments on the economy.”

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