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Bloomberg

Chile Lifts Rate to 3.25% as Consumer Spending BoomsDecember 16, 2010, 4:43 PM EST

By Sebastian Boyd and Randy Woods

(Updates with bank comment in fifth-seventh paragraphs.)

Dec. 16 (Bloomberg) -- Chile’s central bank raised its overnight interest rate for a seventh straight month as consumer demand growth threatens to push

inflation beyond policy makers’ targets next year.

The five-member policy board, led by bank President Jose De Gregorio, raised the benchmark rate by a quarter-point to 3.25 percent from 3 percent today,

matching the forecast of 16 of 22 economists surveyed by Bloomberg. Six economists predicted the bank would pause at 3 percent.

South America’s fifth-biggest economy has rebounded from its deepest contract ion in more than a decade on expansive interest rates and a surge in domestic

consumer spending. Policy makers today decided to raise to prevent inflationary pressures from surging in coming months even after reports showed growth

has slowed and prices rose less than forecast, Jorge Selaive, chief economist at Banco de Credito e Inversiones in Santiago, said.

“The bank put a priority on price increases that are brewing over the mid-term rather than focusing on the controlled, short-term inflation data,” Selaive said in

a phone interview. “The bank next month will opt to stop raising as it waits for inflation rates to materialize.”

Policy makers expect to keep raising rates in line with economic developments, according to their statement released with today’s decision.

‘Evolving Positively’

The bank dropped language from its previous statement in which it described Chile’s economic growth as “robust,” saying instead that demand was “evolving

positively.”

Slow growth in developed economies presented a risk to emerging countries, the bank said.

It noted that the peso had appreciated since its previous meeting, without adding further comment.

Chile’s peso has gained 5.3 percent against the dollar in the past three months, beating six other major Latin American currencies tracked by Bloomberg. The

peso today rose 0.1 percent to 473.25 per dollar from yesterday’s close of 473.85.

The peso’s appreciation helps pare the cost of imports and probably has allowed the central bank to reduce the pace of rate increases, De Gregorio told

senators Dec. 14.

Prices, Growth

Consumer prices rose 0.1 percent in November from the previous month, lower than the median 0.2 percent forecast among economists surveyed by

Bloomberg. Core prices, which exclude fuel and produce, fell 0.1 percent in the same period.

Prices last month rose 2.5 percent from a year earlier, below the central bank’s target of 3 percent. According to the median estimate of 47 investors and

traders in a Dec. 9 survey, consumer prices will rise to 3.3 percent in 12 months.

The falling unemployment rate could put pressure on wages and, in turn, inflation rates in the coming months, Alejandro Puente, an economist with Banco

Bilbao Vizcaya Argentaria SA, said in a Dec. 14 interview.

Chile’s jobless rate has fallen from 8.6 percent in the three months through April, when the government changed its methodology for measuring unemployment,

to a lower-than- estimated 7.6 percent through October.

The $164 billion economy expanded 7 percent in the three months through September from last year, the fastest quarterly growth since 2005, according to thecentral bank.

Rate Horizon

Economic activity expanded 4.8 percent year on year in October, down from a revised 6.7 percent rise in September, the central bank said Dec. 6.

The median estimate of 16 economists surveyed by Bloomberg was for a 5.8 percent increase in October. According to the median estimate of 42 economists

in a Dec. 10 central bank survey, the pace will rise to 5.5 percent in November,

Chile’s gross domestic product will expand 5.2 percent this year over last and 6 percent in 2011, which would be the fas test annual increase since 2004,

according to the survey.

Internal demand -- particularly retail sales -- has helped boost economic activity s ince last year ’s recession and the February earthquake that caused an

estimated $30 billion in damage, Puente said.

Thursday December 16, 2010

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Retail sales in Chile rose 16 percent in October from last year, 18 percent year on year in September and 13 percent in August, the National Statistics

Institute said Nov. 29.

At 3.25 percent, Chile has the third-lowest benchmark interest rate of major Latin American economies behind Colombia and Peru, according to data compiled

by Bloomberg.

The central bank will raise its benchmark rate to 4 percent by June next year, implying policy makers will pause in coming months, according to the median

estimate of 47 investors and traders in a Dec. 9 central bank survey.

--With assistance from Dominic Carey and Fernando Simon in Sao Paulo. Editors: Robert Jameson, Bill Faries.

To contact the reporters on this s tory: Sebastian Boyd in Santiago at Sboyd9@bloomberg.net; Randy Woods in Santiago at rwoods13@bloomberg.net

To contact the editor responsible for this story: Joshua Goodman at jgoodman19@bloomberg.net

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