Chile Central Bank Lifts Rate First Time in a Year

Chile Central Bank Lifts Rate First Time in a Year

http://www.bloomberg.com/apps/news?pid=20601086&sid=aQJb8zCb6_ds&refer=latin_america

By Matthew Walter

July 12 (Bloomberg) -- Chile's central bank lifted its benchmark lending rate for the first time in a year and signaled more rate increases will be necessary in the coming months to contain inflation.

Policy makers raised the overnight rate to 5.25 percent, matching the forecast by 19 of 20 analysts in a Bloomberg survey, as higher food and energy prices and tight production capacity increase the risk that inflation will accelerate beyond the bank's target range.

``In the most likely scenario it will be necessary to reduce monetary stimulus in the coming months,'' the bank said today in a statement on its Web site.

The bank may need to lift the rate as high as 6 percent by the end of the year to keep inflation near its target of 3 percent, plus or minus one percentage point, Alberto Ramos, senior Latin America economist with Goldman Sachs Group Inc. said after the decision.

``It's definitely hawkish,'' he said in a telephone interview. ``They are telling us they are going to do more. Rates are still below their neutral level.''

Chile, the world's biggest copper producer, probably had faster-than-expected economic growth in the second quarter on high metals prices, accelerated job growth and increased government spending, the bank said today.

Chilean consumer prices rose 0.9 percent in June from the previous month, the most since September 2005, pushing the annual inflation rate to 3.2 percent.

`Surprised'

``June inflation surprised on the upside,'' said Luis Arcentales, an economist at Morgan Stanley in New York. ``The inflation picture supports a call for tightening.''

The median 2007 inflation forecast of 36 economists in a central bank survey this week was 4.1 percent, up from a forecast of 3.2 percent in the bank's June 6 survey. That would put inflation above the central bank's target.

Food prices in June made the biggest jump in almost 10 years, surging 2.2 percent and accounting for 60 percent of the increase in consumer prices, according to a report yesterday by Bear Stearns & Cos. analysts Emy Shayo and Tim Kearney. The same trend in food prices is evident throughout Latin America, the report said.

``Prices for various food products remain high and some have even continued rising,'' the central bank said today.

Citigroup Inc. on July 6 raised its forecast for Chile's annual inflation this year to 3.8 percent from a previous 3.2 percent.

Pressures

At the bank's June 14 meeting, policy makers said it would be necessary to boost rates in the short term as rising food and oil prices and increased domestic demand increase inflationary pressures, according to the meeting minutes.

Miguel Cardoso, head of economic research at BBVA Chile, expects the bank to lift the overnight rate by at least a half a percentage point in 2007 to 5.5 percent.

``Prices are probably going to remain relatively high,'' Cardoso said.

Chile's peso has gained 2.4 percent since June 27 on expectations the central bank will lift the overnight lending rate today. The currency rose 0.6 percent to 516.05 per dollar today.