Chile central bank seen holding rate Thurs, strong peso in focus

Thu Apr 11, 2013 11:09am EDT

* 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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