Friday, June 13, 2008

Chile's Central bank To Raise Rates

Chile's Central Bank May Raise Interest Rate as Inflation Soars

By Sebastian Boyd

June 10 (Bloomberg) -- Chile's central bank will probably raise the benchmark lending rate for the sixth time in the past 12 months as policy makers seek to slow the fastest inflation since 1994.

Central bank President Jose de Gregorio will increase the overnight rate by a quarter percentage point to 6.50 percent, according to 12 of 24 forecasts in a Bloomberg survey of 24 economists. Six analysts expect a half-point increase and six expect no change.

Chile's inflation rate has tripled in the 12 months through May to 8.9 percent and is more than twice the central bank's target of 2 percent to 4 percent. Food prices have risen 19.4 percent in the past year, while the cost of crude oil has more than doubled.

``They'll have to raise rates,'' said Rodrigo Valdes, Barclays Capital's chief Latin American economist and a former head of research at the central bank. ``The question is whether by a quarter-point or a half-point, and they'll probably have to raise more down the road.''

Chilean economists raised their 2008 inflation forecast to 5.5 percent, according to a central bank survey published yesterday, up from the forecast of 4.7 percent a month earlier. Stripping out food and fuel costs, the 12-month core rate of inflation rose to 8.4 percent.

``The surprise would be if they do nothing,'' said Benjamin Sierra, head analyst at Bandesarollo Administradora de Fondos in Santiago. ``They're likely to do it now and if they don't, they'll have to in the future as price pressures remain strong.''

Drought, Pause

The central bank has paused at its four meetings since raising rates in January. At their last meeting on May 8, policy makers debated a quarter-point increase, according to the minutes published June 3.

The country's worst drought in a century cut agricultural production while denting hydroelectric output, fanning domestic food and fuel prices.

Rising fuel costs threaten to slow economic growth in Chile, which imports almost all of its oil and gas, the central bank said May 12. The government last week announced $1 billion in fuel subsidies and an 80 percent rebate on diesel taxes for striking truckers.

Since the bank's last meeting, growth has rebounded, with the May economic activity report showing a 4.8 percent year-on- year expansion, more than the 3.5 percent median estimate of 21 economists in a Bloomberg survey.


Chilean economists raised their 2008 forecast for economic growth to 4 percent from 3.8 percent a month earlier, according to the central bank survey published yesterday. Heavy rain has raised water levels in hydroelectric dams, curbing concern of power cuts to mines and cities Chile's south and central regions.

State-owned Codelco, the world's largest copper-mining company, Freeport-McMoRan Copper & Gold Inc. and Anglo American Plc have mines in the area that was struck by drought.

Copper accounted for more than half of Chile's exports last year.

The overnight rate may end 2008 at 6.50 percent and drop to 6.25 percent by year-end 2009, according to the survey conducted by the central bank on June 6.

Economists last month had forecast a 2008 year-end rate of 6.00 percent and 5.75 percent in December 2009.

Chile's peso surged the most in three months on June 5, when the National Statistics Institute published May consumer price data, on expectations the central bank would lift the benchmark rate.

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.

To contact the reporter on this story: Sebastian Boyd in Santiago at

Last Updated: June 10, 2008 00:00 EDT

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