Chilean Benchmark Interest Rate of 0.5% Not to Be Kept Much Longer

April 15, 2010

The Central Bank of Chile slashed the key Chilean interest rate from 8.25% at end-2008 to 0.5% seven months later and is now preparing markets for a fairly aggressive rise in rates later this year.  Policy remains on hold for now, pending a better assessment of the impact of the devastating earthquake that hit near Santiago on February 27.  The central bank projects above-target inflation of 3.7% this year but has been unable to measure prices in the stricken area.  Based on available information, consumer prices posted a monthly rise of just 0.1% in March, down from gains of 0.3% in February and 0.5% in January, and the 12-month rate of increase held at just 0.3%.  These benign results are considered unrepresentative and unsustainable.  In a monetary policy report issued last month, officials warned investors that rates would be ratcheted up faster than then now priced into markets, and a statement from the central bank after today’s meeting did not back away from that view.  It looks like the first rate move will probably occur a bit before or around midyear, and that over 200 basis points of rise will be administered within the next twelve months.  Reconstruction from earthquake damage will exert a strong growth stimulus in the second half of this year and beyond.  Central bank officials have projected a range of economic growth in full-2010 that is entered upon 4.75%.

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



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