Chile central bank seen holding rate Thurs, strong peso in focus
* Chile's key rate seen held at 5 percent again * Central bank, govt meet Thursday to discuss peso strength * Currency at same level that triggered intervention in 2011 By Anthony Esposito SANTIAGO, April 11 (Reuters) - Chile's central bank is expected to keep its key rate steady at 5.0 percent later Thursday and analysts will likely scour the post-meeting statement for any references to the strong peso, a point of growing concern in the export-dependent economy. In a public display of unease with the matter, Finance Minister Felipe Larrain said he will meet with Central Bank President Rodrigo Vergara prior to the monetary policy meeting to discuss the peso's strength. The local currency climbed to 465.50 per dollar on Tuesday, the same level that had triggered a central bank currency intervention in early 2011 to curtail its strength. "We have a prior meeting with the president of the central bank, where we will discuss in depth the issue of the peso and other matters," Larrain told reporters on Thursday. The central bank has kept its benchmark lending rate steady at 5.0 percent since a surprise cut in January 2012, as buoyant growth, low inflation and a strong peso, and persistent economic threats from abroad, keep its hands tied. Analysts surveyed in the central bank's latest poll said they saw the benchmark rate holding steady at least through December before being hiked to 5.25 percent within 11 months. "We don't see likely changes in the bank's monetary policy bias" brokerage Banchile Inversiones said in a note to clients, referring to the post-meeting statement. The bank has said the rate is in a range considered neutral, which in standard monetary policy parlance means it neither spurs nor curbs economic growth. "However, we believe there may be an important reference to the appreciation of the peso, specifically its causes, which has appreciated versus the dollar and also in multilateral terms," the local brokerage added. The peso has been buoyed by Chile's robust economy, an attractive rate differential and healthy prices for the nation's top export, copper. So-called quantitative easing measures adopted in developed economies have also helped fuel the peso's appreciation. It 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 accumulated an additional gain of over 2 percent in 2013. Though the peso "is likely to remain under strengthening pressure from capital inflows charged by global liquidity and attracted by solid fundamentals and high interest rates," there is limited room for additional appreciation, as an exchange rate closer to 460 per dollar increases the likelihood of intervention, RBS economist Felipe Hernandez said. Chile's central bank deployed a dollar-purchasing program in 2011, increasing its foreign reserves by $12 billion, to curb peso strength after it appreciated to 465.50 per dollar, then its highest level in more than 2-1/2 years. In recent weeks, the bank has said a currency market intervention is one of the tools at its disposal, but it has also highlighted the costs associated with using that measure. SURGING DEMAND The bank is also concerned with reining in robust domestic demand, which has been growing faster than gross domestic product and has helped fuel a widening current account deficit. Analysts have said the bank could raise its key interest rate to rein in buoyant demand sooner than forecast, but it may have to incur a currency intervention before a hike to avoid further strengthening the peso. Over the weekend, bank board member Enrique Marshall said the bank will act if the local economy maintains dynamism "above what is reasonable," and interest rates are the best instrument at the entity's disposal. Sturdy domestic demand, an economy nearing full employment and heavy investment have protected the world's No. 1 copper producer from a sharp slowdown on the back of global economic woes, but many analysts are now worried about overheating. Those fears haven't yet materialized into inflationary pressures. Chile's consumer price index posted a 0.4 percent rise in March, its fastest pace since October, but the 12-month figure of 1.5 percent remained well below the central bank's tolerance range of 2 percent to 4 percent. Elsewhere in the region, inflation in Brazil pierced the government's target ceiling in March for the first time in over a year but the rise was slightly less than expected, fueling bets the country's central bank could wait until May to start hiking interest rates. The Mexican annual inflation rate climbed above the central bank's target ceiling in March, crimping policymakers' ability to lower borrowing costs as the peso currency soared to 20-month highs. Mexico's central bank cut its benchmark interest rate to an all-time low of 4 percent in early March in what was seen as a bid to tamp down the appeal of the currency, but the peso has kept gaining, up about 6 percent this year.
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