The Bank of Chile “continue[s] to reduce monetary stimulus,” raising rates yesterday to 3.5 from 3.25 per cent. Inflation fell last month and is below the 3 per cent target, at 2.7 per cent in the year to January. The trend, however, is strongly upward and recent deflation will be fresh in the minds of policymakers. Last month, Chile held.

Chile has held rates at 3.25 per cent, following its pledge to buy $12bn in the forex market to weaken the peso. Pundits had been split roughly equally between a rate hold and a small rate rise. The central bank has typically been raising rates regularly but by small increments of late (see chart, right).

Inflation in Chile is running at 3 per cent, exactly on target (which allows for one per cent either side of this) – but it is rising quickly. Chile recently pointed to the effect of the Fed’s $600bn stimulus programme on its currency – i.e. causing appreciation – and in doing so, joined a chorus of opposition from emerging markets trying to cope with an influx of “hot money”.

Chile has again raised rates, though it has suggested the pace of rate hikes may slow due to lower-than-expected inflation:

Inflation has proceeded slightly below expectations… With respect to the dollar, the peso remains fairly unchanged since the last meeting. Read more

Chile’s central bank is still raising rates, but more slowly. On Thursday, the Bank increased its key policy rate 25bp to 2.75 per cent, as expected. This marks a slowdown for the Bank, which has increased rates by 50bp every month since June.

Banco de Chile cited an appreciating peso and a slowdown in developed economies as key risk factors: “Slower than expected recovery in developed countries is an important risk factor facing emerging economies.” Inflation has also tempered more quickly than expected with annual inflation currently standing at 1.9 per cent; short- to medium-term inflation expectations have also fallen and are now bang on target at 3 per cent.

Chile’s central bank has agreed on the third consecutive half point rise, taking its policy rate to 2 per cent.

Interest rate futures point to a year-end level of 3.75 per cent, but analysts are divided about the likely pace of increase. Read more

Growing concern amongst Asian central bank governors about capital inflows, which have seen a number of countries embrace once-dreaded capital controls, appears to be spreading to Latin America. Chile’s unflappable central bank governor, José De Gregorio, today expressed his concern about the growing number of foreign investors piling money into emerging markets. He says it is time to keep an eye on capital inflows.

According to El Mercurio newspaper, this is what he had to say at a seminar:

Capital flows are worrying me . . . This is not yet a problem in the Chilean economy, but we have to remain relatively alert and thinking about what implications this will have for monetary policy.

High copper prices, global stock market gains and the expectation that Chile’s central bank will continue to raise rates regularly have helped push the peso currency higher – it recently touched a five-month high. It has eased a little today against the dollar, trading around 513 to the greenback.

If De Gregorio is concerned, Bertrand Delgado, a senior analyst at Roubini Global Economics, says he has a few options to manage dollar liquidity. Read more

Economists surveyed by Chile’s central bank believe a 50 basis point rate rise is on the cards for Chile. The August policy rate will rise from 1.5 to 2 per cent, according to the median estimate of 37 economists. At year-end, the rate will be 3.5 per cent – a 50bp rise from last month’s survey – rising to 5.75 per cent by mid-July 2012. Historical rates are shown below:

Chile, which has bounced back more strongly than expected from a devastating earthquake at the end of February, has hiked its key lending rate by 50 basis points, becoming the latest country in the region to start reining in monetary stimulus measures after recent rate rises by Peru and Brazil.

The half-point hike, to 1 per cent, was at the top end of market expectations, wrongfooting many who had expected the bank to take a more softly-softly approach.  The key lending rate had been at a record low of 0.5 per cent since July 2009 and the bank had not raised the rate since September 2008, when it was 8.25 per cent. Read more from Jude Webber on

After a couple of months of “will-they, won’t-they?” speculation, and, according to central bank minutes, increased discussion among bank board members themselves, Chile’s central bank is finally expected to begin raising interest rates when it meets on Tuesday.

Widespread expectations are for a 25 basis point rise, which would be the first increase since the bank jacked up its key monetary policy rate, or TPM, by 50 basis points in August 2008. The rate has been at a historic low of 0.5 percent since July 2009.

The bank has Read more

By Jude Webber

Official data showing that the Chilean economy grew at its fastest monthly rate in a decade must be music to the ears of Sebastián Piñera, the new president. His election pledge to boost annual growth to 6 per cent always sounded ambitious, and looked especially so after the country’s devastating earthquake at the end of February.

But what the April data revealed was a speedier-than-expected business rebound. Bloomberg puts this in context:

The economy expanded 8.2 percent in April from March, the biggest increase since 1996, and 4.6 percent from a year earlier, the central bank said today on its website. It was the quickest annual growth since September 2008 and double the median forecast of 10 economists surveyed by Bloomberg.

April’s expansion comes after the economy shrank the most since 1996 in March following an 8.8-magnitude earthquake on Feb. 27 that caused almost $30 billion in damage. The faster- than-forecast expansion added to speculation that the central bank will raise its benchmark interest rate June 15 for the first time since September 2008.

The data raise two questions. Read more