Another Rate Increase in Chile

December 16, 2010

The Central Bank of Chile boosted its overnight rate after every monthly policy meeting since June.  With another 25 basis points announced today, the key rate has climbed from 0.5%, the level from July 2009 until mid-June, to 3.25%, but the new rate remains 500 basis points below the last cyclical peak of 8.25% at the end of 2008. While a majority of analysts expected today’s rate hike, some did not.

Monetary officials have been acting pre-emptively even though CPI inflation of 2.5% last month was less than the 3.0% target.  Real GDP had expanded 8.1% at an annualized rate in the third quarter and by 7.0% between 3Q09 and 3Q10.  Retail sales growth exceeds 10% compared to a year ago.  Nonetheless, the final quarter of this year has seen signs of lessening growth, and a statement from the central bank today suggests the slowdown is more than a blip.  Growth was called strong in the previous November statement but is now considered to be “evolving positively.”  The statement also observes that the peso continues to strengthen against the U.S. dollar. 

Some forecasters are already predicting no rate increase in January.  While possible, that view doesn’t come with a guarantee.  Against a 3.0% expected rate of inflation according to some measures, a 3.25% central bank rate still represents a pretty accommodative stance.  Most likely, officials will wait and see how demand, prices and production evolve over the coming, as well as monitor the peso and how its rise might be affecting net foreign demand for Chilean products for guidance on what action to take at the January meeting.

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

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