Chile Forum

Inflation needs decisive attack: Chile cbank chief
Fri, Mar 4 2011

PARIS/SANTIAGO (Reuters) - Chile's central bank must attack inflation to mitigate risks from higher oil and food prices, bank president Jose De Gregorio said on Friday, seen as a signal the bank could opt for steeper interest rate hikes.

De Gregorio's comments in a speech in Paris contrasted with minutes from the central bank's February rate-setting meeting released earlier on Friday, in which board members cautioned against "overreacting" to inflationary expectations, noting core inflation was limited.

The minutes appeared to rule out accelerating the pace of raising its interest rates, saying that it could send the wrong signal about inflation expectations and suggesting more steady, gradual rate hikes like February's unanimous 25 basis point increase are to come.

Several of the board's five members preferred in the minutes from the February 17 rate-setting meeting to be "prudent" and not overreact to rising inflation expectations in light of muted underlying, or core, inflation.

However one unidentified board member said if inflation expectations increased persistently, steeper interest rate increases may be necessary.

Speaking at a global central bankers meeting in Paris, De Gregorio said not acting on inflationary pressures could hit credibility and the ability to rein in prices.

"The risk of propagation toward prices in the wider economy must be mitigated, in particular in economies like Chile's, which are producing close to their potential," De Gregorio said in the speech, a copy of which was released in Santiago.

"Not attacking inflationary pressures could affect credibility, which would have negative consequences for the future capacity to achieve stable inflation with low costs in terms of activity," he added.

The comments were viewed by some as suggesting steeper interest rate increases.

"It (De Gregorio's comments) suggests they're contemplating a 50 basis point increase at the next meeting... This points clearly to the possibility of steeper rate hikes ahead." said Matias Madrid, chief economist Banco Penta in Santiago.

Brazil and Chile are among a slew of emerging market countries from India to Israel that tightened monetary policy this year to fight inflation fueled by higher global prices for food and commodities.

Chile's central bank has repeatedly voiced concern about rising prices and signaled at February's monetary policy meeting more rate hikes would follow.

The board only considered a 25 basis point increase last month, according to the minutes. A decision to hold rates in January was the first pause since the central bank started raising rates last June.

"Several board members said that while inflation expectations had risen ... it did not seem prudent to overreact at this moment, especially because effective inflation, and in particular core inflation, were limited," the bank said in a statement.

"Accelerating the pace of rate normalization after a pause in January could be confusing because it could be interpreted as an abrupt change in the central bank's inflation forecasts, which is not the case," it added.

Chile's central bank resumed its cycle of rate hikes despite the fact the local peso has bounced back to levels that prompted a $12 billion currency intervention in January, hurting exporters and raising questions about what additional steps the bank and government could take.

Chile's central bank was seen raising its benchmark interest rate by 25 basis points to 3.75 percent at its March monetary policy meeting, a fortnightly central bank poll of traders showed last month.

The bank is seen raising its benchmark rate to 5 percent in six months time', meaning the market is betting on steady interest rate increases.

Inflation quickened in Brazil and Chile in January on rising food and transport costs, putting more pressure on central bankers to push interest rates higher.

Chile releases February inflation data on March 8.

Chilean consumer prices are seen rising 0.2 percent in February after a 0.3 percent increase in January, according to a Reuters poll. Core inflation rose 0.1 percent in January.

With prices for main export copper near life highs and the dollar weak internationally, the peso is firming on factors beyond Chile's control.