Chile's Central Bank Raises Rates

Chile's central bank raised its benchmark lending rate to the highest in six years as it seeks to curb the fastest inflation in a decade. Policy makers raised the benchmark rate a quarter point to 6.25 percent in a meeting yesterday.The bank acted in response to inflation that climbed to an annual rate of 7.8 percent in December, driven by higher costs for food and transportation. The question is, with the US Fed set to lower rates rapidly, will this move curb inflation, or attract funds which can only serve to accelerate it. With the Peso set to rise, dollar denominated loans are going to look increasingly attractive to Chilean clients.




It was the second consecutive monthly increase as the bank tries to bring inflation down to its target for two years from now: 3 percent plus or minus 1 percentage point. The bank's overnight lending rate has risen from a low of 1.75 percent in the first eight months of 2004.




December's inflation was a ``significant surprise,'' the central bank said after the meeting. ``Further additional adjustments may be necessary to guarantee that inflation converges with the target rate.''

The Chilean peso rose to its highest level versus the dollar since 1999 today on expectations the central bank would lift rates while the U.S. Federal Open Markets Committee cuts.




Chile's economy grew 4.6 percent in November from a year earlier. It is the only Latin American country to have closed its income gap with the U.S. since 1990, as surging demand for the country's exports has stoked expansion, Finance Minister Andres Velasco told El Diario Financiero last week.