Chile central bank could accelerate rate hikes to tame economy

Mon Apr 1, 2013 2:33pm EDT

Related Topics

* Central bank expected to up 2013 GDP forecast on Tuesday
    * Buoyant domestic demand seen a growing worry
    * Central bank could raise rates earlier than forecast,
analysts say
    * Intervention to tame strong peso may come first

    By Anthony Esposito and Moises Avila
    SANTIAGO, April 1 (Reuters) - Chile's central bank could
raise its key interest rate to rein in buoyant domestic demand
sooner than forecast, but it may have to preface the hike with a
currency intervention to avoid further strengthening the
export-dependent country's peso.
    With domestic demand and economic growth in the world's No.
1 copper producer expanding at explosive rates, most local
figures point to a no-brainer: the bank should hike rates. 
    But a surging peso, tame inflation and persistent external
risks have maintained the bank in a wait-and-see mode since a
surprise cut to 5 percent in January 2012.
    Traders polled by the bank see the rate at 5.25 percent in a
year. Though as Chileans continue to pack malls, some analysts
say the bank could seek to cool the economy - which some say is
at risk of overheating - in the second half of this year. 
    The bank may first have to launch a costly foreign exchange
intervention or so-called macroprudential measures to protect
the Andean country's crucial exports. 
    "An interest rate hike on its own isn't a solution. It's the
interest rate plus a currency intervention, because an interest
rate (hike) by itself would serve to further appreciate the
peso," former central bank chief Roberto Zahler told Reuters.
    The peso was one of the strongest performers against the
U.S. dollar among 152 currencies tracked by Reuters after
appreciating 8.48 percent last year, and has firmed an
additional 1.4 percent in 2013. 
    It has been buoyed by Chile's attractive rate differential,
healthy prices for top export copper and robust economy.
 
    
    ROBUST GROWTH
    Chile's economic growth sped up in the last quarter of 2012
boosted by domestic demand, and clocked a robust 5.6 percent
expansion for the full-year, one of Latin America's strongest
economic performances. 
    And the bank is expected to increase its forecast for 2013
GDP growth to between 4.5 percent to 5.5 percent when it
publishes its quarterly Monetary Policy Report (IPoM) on
Tuesday, according to the median estimate of 10 analysts and
economists polled by Reuters. The economy is currently seen
expanding between 4.25 percent and 5.25 percent.
    The bank is also expected to up its 2013 inflation view to
3.0 percent from 2.9 percent.
    But the bank's tone on rates won't necessarily shift. 
    "Considering that inflation indicators and expectations
remain anchored near the bank's (3 percent) target, it is very
likely that the bank's monetary policy bias will remain
neutral," Inversiones Security said in a note to clients.
    According to standard monetary policy parlance, a neutral
interest rate neither spurs nor curbs economic growth.
    
    FOREX INTERVENTION EYED
    Though the bank may not give explicit clues in Tuesday's
report, some analysts posit it could intervene in the currency
market if the peso doesn't weaken on its own.
    "My gut feeling is that the Chilean central bank is already
laying the ground for FX measures," said Michael Henderson,
Latin American economist at Capital Economics in London.
    "If you look at the last couple of post-meeting statements,
they've been upping the emphasis on the strength of the
currency. I don't think we're there yet, but I've no doubt that
if the peso gets closer to, say, 465 (per dollar) they'll
announce something," Henderson added.
    The peso ended at 472.50 per dollar on Monday. 
    A dollar purchasing program, designed to take greenbacks out
of the local market and beef up foreign currency reserves, would
be the most likely course of action, analysts said. The bank
deployed a dollar-purchasing program in 2011 to curb peso
strength after it appreciated to its highest level in more than
2-1/2 years at 465.50 per dollar.
    "We're always concerned about the appreciation of the peso
and about having a competitive currency, but we're fighting an
uphill battle, against quantitative easing in the United States
and other major developed nations," Finance Minister Felipe
Larrain told Reuters.
    Latin America has fretted over stimulus measures in the
developed world, which have increased capital flows to the
region from investors seeking better returns.
    "That puts enormous pressure on the exchange rate and we're
responding to that but within the realm of our possibilities,"
Larrain added.
    The minister has said the government has tools at its
disposal, including so-called macroprudential measures such as
imposing limits on foreign exchange exposures for banks.
    The bank will eventually need to rein in stubbornly strong
local demand by hiking rates, most analysts surveyed said. But
not all analysts are convinced that the bank should take action
to hold back the peso from firming further.
    "We (see) current conditions as likely temporary, fruit of a
mining investment boom that will wind down over time. The
currency should be allowed to appreciate (this will be temporary
also) and if there are no second order effects on inflation
there is no need to hike interest rates," said Nomura analyst
Tony Volpon.
    "In short, market mechanisms are working and the best course
of action is to do nothing," Volpon added.
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