UPDATE 1-Chile inflation higher than forecast, sparks peso rally

Thu May 8, 2014 9:02am EDT

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SANTIAGO May 8 (Reuters) - Inflation in Chile rose far above market expectations in April, sparking a peso rebound as traders bet against an interest rate cut later this month.

Consumer prices rose 0.6 percent in April, the government's INE statistics agency said on Thursday. That compared to a Reuters poll forecast for a 0.2 percent rise.

In the 12 months to April, inflation was 4.3 percent, breaking above the central bank's 2 percent to 4 percent target for the first time in around two years.

In reaction to the inflation reading, the peso rallied 1.07 percent against the U.S. dollar as traders scaled back bets the central bank would cut its benchmark interest rate at its next monetary policy meeting.

The latest inflation reading hands the central bank a dilemma when it meets to decide the key interest rate next week. It has cut rates 100 basis points since October in a bid to stimulate Chile's flagging economy, but further cuts could risk inflation spiralling.

A depreciation in the Chilean peso has made fuel and other imported goods more expensive, driving up prices. Food, drinks, health care, housing and basic services costs all rose in the month, said INE.

The central bank has flagged that it expected inflation to test the high end of its tolerance range for some months, but that it should cool down as economic deceleration outweighs the effect of the weaker peso.

But concerns over faster inflation stayed its hand at last month's monetary policy meeting. Minutes showed that the board decided to pause in its easing cycle, holding the benchmark rate at 4.0 percent, as it weighed the persistence of recent inflationary "surprises".

A central bank poll released last month showed traders expected a 25 basis point cut to 3.75 percent.

Core inflation in April was 0.8 percent.

For a link to the INE report see: here

(Reporting by Santiago newsroom, Writing by Rosalba O'Brien, Editing by W Simon)

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