Currencies in Freefall Handcuff Bankers From Chile to Colombia

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Central bankers in commodity-dependent Andes economies aren’t even considering interest-rate cuts to revive growth, even as prices for oil, copper and other raw materials collapse.

That’s because the deepening price slump is also dragging down currencies in Colombia and Chile -- a swoon that’s fanning inflation and tying policy makers’ hands. Fixed-income traders have now ratcheted up cost-of-living expectations for Colombia and Chile after their tenders sank more than 10 percent in the past three months.

“It’s causing a headache,” Luis Oscar Herrera, the chief Andean region economist at BTG Pactual SA, said by telephone from Santiago. “All the Andean countries have headline and core inflation above their target ranges.”

In an interview with local newspaper La Tercera published Sunday, Chile central bank President Rodrigo Vergara said rate cuts are completely off the table as the sinking peso fuels price acceleration. That’s even after Chile’s economy shrank 0.07 percent on a seasonally adjusted basis in the first five months of the year, buffeted by the nosedive in copper prices. Chile is the world’s biggest exporter of the metal, which has tumbled 26 percent in the past year.

Chile Break-Even

The decline in the peso to close to a 12-year low has helped push annual consumer price increases in Chile to 4.4 percent, exceeding the central bank’s target range for the 14th month in 15.

The Chilean peso gained 0.2 percent to 681.17 per dollar as of 1:16 p.m. in Santiago. Its lowest close since 2003 was 682.75 per dollar in November 2008.

Traders now expect inflation to accelerate to an average 3.23 percent over the next two years, based on a swap-market gauge known as the break-even rate. In June, they expected annual living expenses to slow to an average 2.71 percent.

In Colombia, consumer prices rose 4.42 percent in June, surpassing the central bank’s target range for a fifth month. Inflation is picking up as the nation’s peso has plummeted more than 35 percent in the past year, the biggest drop among more than 150 currencies tracked by Bloomberg after the Russian ruble and the Ukrainian hryvnia.

The Colombian peso fell 0.2 percent Thursday to 2,957.23 per dollar, the weakest since April 2003.

Traders have pushed the one-year break-even rate in Colombia to 3.3 percent from 2.33 percent just last month.

On Monday, central bank Governor Jose Dario Uribe said the peso’s fall to a 12-year low poses a threat to policy makers’ objective of keeping inflation expectations close to their 3 percent target. A day later, Finance Minister Mauricio Cardenas sought to play down the peso’s impact on consumer prices, saying inflation will slow as the economy cools.

‘Make Noise’

Colombia gets about half of its export revenue from crude, which has dropped 54 percent in the past year.

Nomura Holdings Inc. strategist Mario Castro says central bankers in Colombia and Chile may actually look to raise rates to quell inflation.

“In Colombia, the central bank is starting to make noise about the effect of inflation and is likely to hike,” he said by telephone from New York. In Chile, “cuts are totally ruled out, and the central bank has been very clear on that. The risks are tilted toward a hike rather than a cut.”