Chile Central Bank Signals Higher Rates on Inflation Surprises

Chile´s central bank raised its inflation forecast for this year and said its key interest rate would probably be “somewhat” higher than forecast by analysts, who see no change until next year.

Inflation will end 2015 at 3.6 percent, compared with the previous estimate of 2.8 percent, the bank said in its quarterly monetary policy report released in Santiago Monday. Policy makers also raised their forecast for core inflation for the year to 3.4 percent from 2.8 percent.

Consumer prices rose more than analysts expected in February for the fifth time in seven months, leaving the annual inflation rate at 4.4 percent, above the central bank´s 2 percent to 4 percent target range for 11th straight month. With inflation above forecast and the labor market tighter than expected, monetary policy probably will be above that implied by analyst surveys, the bank said.

“Inflation will remain above 4 percent for some more months, approaching the 3 percent target range through 2016,” bank president Rodrigo Vergara said in a speech to lawmakers in Congress. “The depreciation of the peso continues to be the main factor behind the dynamic of prices.”

The central bank left its key interest rate at 3 percent on March 19 for a fifth consecutive month after Vergara said inflation would take longer than forecast to slow to target. The bank paused after cutting rates eight times in the 12 months through October.

“The trajectory the benchmark interest rate will follow will be somewhat higher than analyst expectations,” the bank said Monday.

Peso Depreciation

The decline in the peso that started in 2013 has been the longest in a decade and has happened amid a gradual deceleration of the economy rather than in an abrupt recession, the bank said in the report.

“This is one of the main variables that explain consumer prices remaining above 4 percent for so long,” policy makers said.

The central bank maintained its growth forecast for this year at 2.5 percent to 3.5 percent, after cutting it in five consecutive monetary policy reports. Risks to growth remain on the downside, it said.

“Partial data from the first quarter continue indicating a moderate annual growth of activity, though without a doubt superior to mid-2014 rates,” the bank said. “Growth will continue under mid-term potential growth, which the bank forecasts at 4 percent to 4.5 percent.”

Economic Growth

Chile´s economy expanded 1.8 percent in the fourth quarter from the year earlier, the fastest pace in five quarters, adding to evidence of a rebound in Latin America´s wealthiest country.

Growth slowed to 1.9 percent over all of last year from a revised 4.2 percent in 2013, the bank said. According to a survey of analysts compiled by Bloomberg, growth will accelerate to 2.7 percent this year.

Economic growth in 2015 will exceed last year´s expansion by at least 1 or 1.3 percentage points, Finance Minister Alberto Arenas said in an interview with Pulso newspaper on March 6. “The economy is regaining more dynamic growth, it´s regaining momentum.”

Still, growth remains weak. While retail sales rose 2.9 percent in February from the year earlier, manufacturing fell 0.1 percent, according to a separate report from the central bank on Monday.

Policy makers cut their forecast for domestic demand growth to rise 2.5 percent this year, down from a previous estimate of 3 percent.

A recovery in consumer and business confidence is “critical” to Chile achieving the growth forecasts, the bank said.

The bank expects investment to rise 1.2 percent this year, compared with their previous estimate of 1.9 percent.

The price of copper will average $2.75 per pound this year, down from a previous estimate of $2.95 per pound, the bank said. Chile is the world´s largest producer of the metal, which accounts for more than half of the nation´s exports.

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