Chile Central Bank Lifts Rates to Five-Year High

Chile Central Bank Lifts Rates to Five-Year High

http://www.bloomberg.com/apps/news?pid=20601086&sid=aNSEyaWs4KhM&refer=latin_america

By Matthew Walter

Aug. 9 (Bloomberg) -- Chile's central bank lifted its overnight lending rate to the highest in five years, seeking to damp quickening inflation fueled by rising wages and a jump in food and energy prices.

Policy makers today said more rate increases will probably be needed in coming months to keep inflation anchored around their target of 3 percent, plus or minus 1 percentage point, according to a statement on the bank's Web site.

``The economy is growing at a very fast pace,'' said Luis Arcentales, an economist in New York at Morgan Stanley in a phone interview before the announcement. ``What they predicted would be an output gap toward year-end is coming sooner than expected.''

Consumer prices may rise as much as 6 percent this year, double the central bank's target, said Miguel Santana, an economist at Banco Santander Chile SA, the country's biggest bank. A cold winter has driven up heating costs and hurt local fruit and vegetable crops, while employers are creating jobs at a rate of about 200,000 per year, spurring consumer demand, he said.

Policy makers lifted the rate by a quarter percentage point to 5.50 percent, matching the forecast from 20 of 24 analysts in a Bloomberg survey.

``The increase in prices for some non-perishable foods and fuels has extended, which has added to unusual increases in prices for various perishable goods, which should in large part be temporary,'' the bank said today in its statement.

Growth

Today's rate increase is the second this year, as the bank tries to cool demand amid economic growth it said was faster than expected in the second quarter. Chile is benefiting from a fourth year of high prices for copper, the country's top export, as well as bigger government budgets and a rise in consumer spending, which the bank said was also more than forecast.

Chilean consumer prices rose 1.1 percent in July from the previous month, the biggest increase since March 2003. Annual inflation rose to 3.8 percent from 3.2 percent the previous month, the central bank said Aug. 2.

``Inflation has been surprising,'' said Rodrigo Aravena, an economist at Banchile Inversiones in Santiago. ``There's been greater economic activity, which creates more inflationary pressure.''

`Inflation Spike'

Lettuce, green-bean and broccoli crops have suffered from an unusually harsh winter, driving up supermarket prices, Aravena said. Snow fell last night in downtown Santiago for the first time in eight years, and meteorologists predict temperatures will drop tonight to a record.

The median forecast for 2007 inflation from the central bank's monthly survey of local economists, published yesterday, rose to 4.8 percent from 4.1 percent in July. The median forecast for the overnight rate rose to 5.75 percent, up from 5.5 percent in the July survey.

Higher interest rates may hurt Chilean stocks in the second half of the year, said Geoffrey Dennis, global markets strategist at Citigroup, which downgraded its Chilean equities rating to ``neutral'' from ``overweight'' four weeks ago.

``There's a nasty little inflation spike developing in Chile,'' he said in a telephone interview. ``We've now started an uptrend in interest rates in Chile which could be fairly significant and could be somewhat prolonged. That typically isn't good news for equity markets.''

Stocks

The Ipsa index of the leading 40 stocks on the Santiago stock exchange has fallen 7.7 percent since hitting a record July 3.

Chile's peso has strengthened 0.9 percent this month on expectations for higher interest rates. The currency weakened 0.2 percent today to 519.23.

Finance Minister Andres Velasco expects economic growth this year to accelerate to 5.8 percent, up from 4 percent in 2006. Velasco yesterday said the government will be ``vigilant'' in monitoring consumer prices and said international food shortages are to blame for a recent increase in inflation.