Chilean Inflation Rate Jumped to Five-Year High in April

Chile´s inflation rate increased more than analysts forecast in April, rising to the highest level in five years and exceeding the target rate, damping expectations of an interest rate cut next week.

Inflation accelerated to 4.3 percent from 3.5 percent the month before, the National Statistics Institute said today, above the 3.9 percent median estimate of 13 economists surveyed by Bloomberg. It was the first time inflation has exceeded the 2 percent to 4 percent target range since February, 2012. In the month, prices gained 0.6 percent.

Policy makers have cut interest rates four times in the past seven months as the economy grows at the slowest pace since the 2009 recession, even as inflation accelerates. In the minutes from its last meeting on April 17, central bankers said rates may fall further as inflation expectations remain anchored at the mid-point of the target range.

“We were expecting a rate cut next week, but the probability of that happening has reduced significantly after this number,” Ruben Catalan, an economist at Banco de Credito e Inversiones in Santiago, said by phone. “The central bank will probably pause to prevent more rate cuts from increasing inflationary pressures.”

The peso surged 2 percent as of 1:16 p.m. in Santiago to a three-week high of 554.51 per U.S. dollar. The two-year swap rate, a measure of expectations for average interest rates, increased 11 basis points to 3.80 percent, the biggest gain for 20 months.

Easing Pause

Price increases were led by food costs, which gained 0.9 percent, alcoholic drinks, up 1.6 percent, and health care, up 1.8 percent. Core prices, which exclude fuel and produce, climbed 0.8 percent last month, the statistics institute said.

“It was a great surprise and it can’t be attributed to a specific item or group of products,” Catalan said. “Apparently, the secondary effects of the peso’s depreciation and the rise in gas prices are impacting all products.”

Inflation has accelerated from 1.5 percent in October of last year as a weaker peso pushes up import costs. The peso has declined 7.2 percent against the dollar in the past six months, the worst performing major emerging market currency tracked by Bloomberg after the Argentine peso.

The pick-up in inflation “is related to the depreciation of the peso and its effect in some sectors,” Finance Minister Alberto Arenas told reporters today. “Today´s numbers don´t change inflation projections for the year and we don´t see inflation risks.”

Inflation Expectations

In the minutes of its last meeting, the central bank said the pick-up was probably temporary and that inflation would return to its 3 percent target. Analysts polled by the central bank have kept their forecast for inflation in 12-month’s time at 3 percent all year.

With inflation expectations anchored at the target, traders and investors had expected policy makers to reduce the benchmark interest rate to 3.75 percent on May 15, according to the latest survey by the central bank. Thirty-seven of 60 people questioned forecast the quarter-point reduction, while 23 expected no change, the bank said April 23.

Rising unemployment and slowing growth should help control price increases. The jobless rate reached 6.5 percent in the first quarter, the highest since the three months through October 2012 and above the 6.3 percent median forecast of 18 analysts surveyed by Bloomberg.

The Imacec index, a proxy for gross domestic product, rose 2.8 percent in March from the year earlier, bringing first quarter growth to about 2.4 percent. That compares with full-year growth of 4.1 percent last year and 5.4 percent in 2012.

(An earlier version of this story corrected the last time that inflation exceeded the target range to two years.)

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