Central Bank of Chile Begins to Normalize Interest Rates

June 16, 2010

The key overnight Central Bank of Chile interest rate was doubled to 1.0% on Tuesday.  The 50-basis point increase was greater than analysts were assuming.  An increase this month had been strongly implied after policymakers met in May.  They had slashed their rate by 600 basis points in the first quarter of 2009, 150 basis points during 2Q09 and by a final 25 bps on July 9, 2009.  But decent growth near 5% has resumed, and today’s policy statement observes that the immediate negative growth impact of February’s earthquake dissipated quickly.  The secondary effect will be positive as infrastructure is rebuilt.  The statement expresses optimism that Europe’s debt problems should not unduly affect global growth, where the outlook is good but associated with uncertainty.  Although below their peaks, the still-high level of copper prices in this producer will be a significant engine of economic growth.  Officials project inflation to hover near the 3% target in the policy-relevant time horizon and promise further rate increases whose exact timing will depend on “unfolding domestic and external macroeconomic conditions.”

Copyright Larry Greenberg 2010.  All rights reserved.  No secondary distribution without express permission.

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