A Sixth Consecutive Chilean Rate Hike

November 17, 2010

The Central Bank of Chile had slashed its policy interest rate during the first seven months of 2009 by 775 basis points from 8.25% to 0.5%, but about a third of that stimulus from last year has now been reversed following Tuesday’s announced increase of 25 basis points to 3.0%. Starting in June, the benchmark was raised 50 bps four straight times and then in September, like today, by 25 basis points.  Rate normalization is warranted, according to the central bank’s statement, to ensure that the 3.0% medium-term inflation target is met in light of strong domestic demand and output and in spite of financial and economic risks posed by Europe’s sovereign debt problems.  The statement notes that many other emerging economy central banks are also engaged in rate-increasing programs.  Chilean inflation since September has actually been somewhat lower than officials anticipated.  While GDP in 2Q was up 6.5% year-on-year, October consumer prices were just 2.0% higher than a year earlier.  However, measures of expected inflation remain consistent with the 3% goal.  The path of future rate advances will be tied to both domestic and global economic conditions. 

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

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