Jump in Chilean Prices Fuels Talk of Early Rate Increase

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  • Consumer prices rose 5% in August from the year earlier
  • Inflation stays at or above top of target range for 17th month

Chilean inflation accelerated more than forecast in August, reaching the fastest pace since November, fueling speculation that the central bank will raise interest rates before the end of the year. One-year rate swaps rose by the most in six months.

Consumer prices rose 5 percent from the year earlier, the National Statistics Institute said on its website Tuesday, compared with the 4.8 percent median estimate of 15 analysts polled by Bloomberg. Prices climbed 0.7 percent in the month, the agency said.

Central bank President Rodrigo Vergara said last week that rates would probably rise in line with market expectations, with two quarter-point increases in the next 12 months and another 25 basis-point gain in the six months after that. Inflation has been at the top end or above the 2 percent to 4 percent target range since April of last year.

“The central bank is facing a very difficult situation and it may have to raise rates before it wanted to,” said Nathan Pincheira, an economist at Banchile Inversiones in Santiago. “If it starts to affect expectations, the central bank will have to act and a quarter percentage point isn’t going to be enough.”

One-year rate swaps climbed 11 basis points, or 0.11 percentage point, the most in six months, to a 15-month high of 3.76 percent after the inflation data. Two-year break-even inflation, a measure of expectations, rose eight basis points to 3.39 percent.

Policy makers will be watching a poll of analysts on Thursday to see if expectations two years ahead are starting to rise above the 3 percent target.

“If we see a change in inflation expectations and that produces a de-anchoring on Thursday, we could see a rate hike as soon as this month,” Pincheira said.

The last time inflation remained above the target range for so long was August 2007 to February 2009, a 19-month period in which the central bank raised the key rate by 3.25 percentage points, and then lowered it by 3.5 points. This time round, the bank has cut rates by a percentage point to 3 percent since inflation accelerated past 4 percent.

The risks for inflation remain on the upside in the short term and are balanced in the long term, policy makers said in their quarterly monetary policy report released on Sept. 1.

“Today’s data, combined with the hawkish message in the central bank’s latest Inflation Report, suggest that interest rate hikes may come sooner than we had originally expected,” Edward Glossop, an economist at Capital Economics, said in a note to clients. “We are sticking to our forecast for rates to begin rising at the start of next year, but acknowledge that there is a chance that rate could be raised towards the end of this year.”