Chile's Central Bank Raises Interest Rates

Chile's central bank raised its target interest rate to 7.75 percent yesterday. This is now the highest level in almost a decade, and marks the strength of the determination at the central bank to slow Chile's inflation back down towards the bank's target zone. Central bank President Jose De Gregorio and his team boosted the key rate by half a percentage point for the third straight month, making borrowing costs the highest since December 1998.



Consumer prices rose at an annual pace of 9.5 percent in July, matching June's rate, the fastest since September 1994. The bank warned that further rate rises will probably be needed to bring annual inflation to its target rate of 3 percent. It should also be noted that real interest rates in Chile are still negative - minus 1.75% - when compared with the current rate of inflation. Core inflation - ie the CPI less fresh fruit, vegetables and energy - was running at 9% in July, which is quite high, and even in relation to core inflation real interest rates are still negative.




Last month's inflation was faster than expected, the central bank said in today's statement. International ``inflationary pressures'' remain even as prices for oil and other commodities have fallen, the bank said.

``Given the deterioration in the inflationary outlook, this rise in the policy rate is necessary to ensure that inflation converges toward 3 percent'' during the bank's two-year policy horizon, it said in the statement. ``In the most likely scenario, further adjustments will be necessary to ensure that inflation converges with the target.''

Chilean economists increased their forecasts for 2008 inflation to 8.0 percent in the August central bank survey - up from the 7.5 percent regisetered in July's survey. They left their forecast for next year's price rises unchanged at 4.5 percent.

Last month's core inflation - which excludes fuel and perishable food - was the fastest since the National Statistics Institute started tracking it in January 1997 as housing, health care and transportation became more expensive. The cost of long- distance bus tickets rose 12 percent. Food climbed 18 percent in the 12 months through July.

Chile's Monetary Policy Group - an independent team of five academics that monitors the central bank's policies - unanimously called on Aug. 12 for the bank to raise rates by half a percentage point and end efforts to weaken the currency. The central bank has been purchasing $50 million a day since April to build reserves and stem gains in the peso - but the academics warned that the weakening of the peso could spur further inflation, on the other hand if they sterilise the purchases (ie reduce the money supply accordingly, then this can be a way to avoid excess liquidity arriving in Chile in the search for extra yield as Chile raises interest rates.

The peso has fallen 16 percent since the central bank announced the dollar purchases April 10.

Chile Industrial Output Falls Again In June

Chilean industrial output shrank 0.9 percent in June over June 2007. This was the second consecutive decline. The industrial production index has now fallen year-on-year in three of the past four months, according to National Statistics Institute data. Unemployment was also higher than expected at 8.4 percent, the institute said today in Santiago.



Metal production fell as output of molybdenum, which is used to strengthen steel, declined 28 percent. The Chilean peso fell 0.51 percent to 510.22 pesos per dollar as of 10.37 a.m. in New York on expectation the data may slow the pace of interest- rate increases.

The central bank raised its overnight lending rate by half a percentage point at each of its last two monthly meetings. The bank is committed to slowing inflation to 3 percent within two years from the 9.5 percent annual pace it reached in June, and will probably need to raise rates again, according to Vice-President Jorge Desormeaux.

Consumer spending fell 2.3 percent in real terms from a month earlier, the third month in a row that sales of consumer goods have declined or remained unchanged. Supermarket sales, which increased 14 percent year-on-year as inflation pushed up the prices of food, rose just 1 percent in real terms.

Chile Economic Growth May 2008

Chile's principal economic activity index, the IMACEC, rose 2.1 percent in May compared with a year earlier, which was a marked slowdown after growth of 4.8 percent in April, according to data from the central bank yesterday. The IMACEC, a monthly index, measures more than 90 percent of the components which make up Chile's gross domestic product. GDP figures are issued quarterly. So it gives us some short term measure of the level of economic activity.




The pace of growth slowed from April, which followed a 0.3 percent contraction in March, the central bank said today. The annual economic growth rate fell to an average of 2.4 percent in the three months through May, from 6.5 percent in the same period a year earlier.


Chilean economists generally cut back their forecasts from over 3 percent after a June 30 government report showing a 2.4 percent contraction in industrial output in May. Similar results in June would leave the country on course for first-half growth of around 3 percent. Production seems in part to have slowed due to strikes, energy shortages and floods that destroyed crops and swept away road and rail access to Codelco's El Teniente copper mine.




June's activity data should be better than May's because heavy rain brought the drought that was causing a rise in the price of price power generated by hydro-electric dams to an end. Water-driven turbines provide as much as 70 percent of power in central and southern Chile. The electricity, gas and water industries probably didn't act as a drag on the economy in June, as they had in earlier months. The depreciation of the peso versus the U.S. dollar during June also helped exporters. The Peso declined 9 percent in June to hit a 10-month low of 527.89 per dollar on June 30.

Chile Inflation June 2008

Chile's annual inflation rate rose to 9.5 percent in June, the fastest pace since 1994, the National Statistics Institute said today. Consumer prices rose 1.5 percent month on month, more than the 1.2 percent rise in May. The core inflation rate was 0.8 percent in June, up from 0.7 percent last month.

Chile Inflation May 2008

Chilean inflation accelerated more than economists expected in May to the highest in more than 13 years, raising speculation the central bank will lift interest rates this month. The peso rose following the news. Consumer prices climbed 8.9 percent in the 12 months to May. Last month alone prices rose 1.2 percent, the National Statistics Institute said today in Santiago.




Chile's peso gained the most in almost three months after consumer prices rose in May more than economists forecast, boosting speculation the central bank will raise interest rates to stem inflation.

The peso climbed after the report. Chile's currency advanced the most since March 11, jumping 1.6 percent to 480.51 per dollar at 4:59 p.m. New York time, from 488.5 yesterday.

In a separate report, the central bank said Chile's economy expanded at a seasonally adjusted 4.1% percent annual rate in April. As can be seen below the Chilean economy has now been slowing steadily since last summer.



The 4.25 percentage-point difference between the Chilean and U.S. benchmark lending rates, along with gains in copper, the nation's biggest export, has helped fuel a 9.5 percent increase in the Chilean peso in the past 12 months.

Banco Central de Chile, which last raised the overnight lending rate in January to a six-year high of 6.25 percent, next meets on June 10. Minutes released earlier this week show policy makers considered a quarter-percentage point rate increase at their May 8 meeting, before unanimously voting to leave the target rate unchanged.