WRAPUP 1-Chile annual inflation slows to 0.9 pct, rate cuts eyed

Fri Jun 7, 2013 12:36pm EDT

Related Topics

* Chile May CPI flat, below forecasts for 0.1 pct rise
    * May trade balance widens on record export revenue
    * Interest rate cut a 'viable option' - finance minister

    By Antonio De la Jara and Felipe Iturrieta
    SANTIAGO, June 7 (Reuters) - Chile's May inflation rate was
zero percent, sending the annual rate down to at least a
two-year low, the government said on Friday, bolstering bets
that the central bank will cut interest rates in coming months
to stimulate flagging economic growth.
    Chile's benchmark interest rate has been frozen at 5 percent
since January 2012, and on Friday, after the inflation data was
released, the country's finance minister, Felipe Larrain, said a
rate cut was a "viable option."
     The Chilean interest rate futures market is
pricing in that the bank will likely hold rates in June. But  
bets are now leaning to a more-than-even chance the central bank
will cut the rate in July to 4.75 percent, Reuters data showed. 
     Central bank data also released on Friday showed Chile's
trade surplus widened to $1.377 billion in May as
export revenue jumped to an all-time record and imports barely
budged.
    Chile's peso was broadly unaffected by the data,
traders said. It was trading 0.95 percent stronger against the
U.S. dollar on profit-taking following the currency's weakening
to a roughly 11-month low due to easing copper prices, Chile's
economic slowdown and bets on a rate cut.    
     Low inflation and a sharper-than-forecast economic slowdown
led the central bank to consider lowering its key rate
 in May and could keep this option alive for the
next central bank monetary policy meeting on June 13.
    
    "Clearly today a rate cut is an option that wasn't present a
few months ago," the finance minister told reporters after
Friday's data was released. "Today it's a viable option," he
said, adding inflation would pick up in coming months.
     Larrain sits as an observer -- but not a voting member --
of the central bank monetary policy committee.
    In May, the consumer price index was unchanged
-- showing in effect zero inflation for the month. It came in
below a forecast 0.1 percent rise, as falls in prices of
housing, water, electricity and fuel were offset by increases in
foods and non-alcoholic beverages, the INE statistics agency
said. Core inflation was 0.1 percent. 
    Inflation in the 12 months through May came in at 0.9
percent, below the bottom end of the central bank's 2 percent to
4 percent tolerance range and the lowest since at least January
2011, when a new methodology was adopted. 
    Separately, central bank data showed the world No.1 copper
producer's May surplus was the highest since May 2011, boosted
by a jump in revenue from exports of the red metal.
    But May's broadly steady imports suggest a slowdown in
Chile's ebullient domestic demand, which has buoyed the broadly
export-dependent economy as global demand ebbs. 
    Economic growth in the first quarter was 4.1 percent
compared with a year earlier, its slowest pace of expansion
since late 2011. The bank forecasts Chile's economy will grow
between 4.5 to 5.5 percent this year, a slowdown from last
year's 5.6 percent expansion. 

 
       

    In a central bank survey released on May 22, Chilean traders
forecast a quarter-percentage point rate cut to 4.75 percent in
12 months' time. However, they still saw the rate at 5 percent
this month, in September and in December. 
    "(Today's data) shows that for the moment inflationary
pressures appear to be contained, which, when coupled with the
recent slowdown in local activity, indicates a more favorable
outlook for a rate cut this year," Banchile Inversiones said in
a note to clients. "However, for the moment we maintain our
vision for a rate hold at the June 13 monetary-policy meeting." 
    Others in the market called on the bank to exert caution.   
    "The central bank shouldn't fall into the temptation of
cutting the rate for now," BBVA said in a note to clients.
"Although 12-month inflation is very low, consumption remains
dynamic and short-term deflationary shocks... have disappeared.
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