September 7, 2018 / 12:48 PM / 14 days ago

UPDATE 1-Chile central bank chief expects interest rate rise in next few months

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By Marc Jones

LONDON, Sept 7 (Reuters) - Chile’s central bank is wary about the possibility that China’s trade war with the United States and the risk of a sustained fall in copper prices could make raising interest rates in the coming months an uncertain task.

The world’s largest copper exporter currently has interest rates at 2.5 percent, and with economic growth and inflation forecast to climb following a 13 percent currency slump this year it is signalling it will soon be ready to start nudging them up.

“We don’t want to get behind the curve in relation to inflation,” Central bank governor Mario Marcel told Reuters in an interview, saying that the baseline scenario was that the move would begin in the next few months.

“The sooner we start (raising rates) the more gradual it can be,” he said.

However, with its biggest export partners China and the United States locked in a trade feud and cooper prices down now around 20 percent this year there is a need to tread carefully.

“Contractionary shocks coming from an economic deterioration of the country’s trade partners’ or a lasting copper price fall would impose downward pressure on inflation,” Marcel said.

“It would widen the output gap, and it may generate an expansionary response of monetary policy or an extension of the current stance of monetary policy.”

Meanwhile the sharp slide in the peso, against the U.S. dollar since the start of the year is serving as a buffer for the economy, the governor said.

Highly dependent on copper exports and having a wide open economy, Chile is well used to wild currency swings. The peso slumped 50 percent between 2014 and 2016 when commodity prices plunged.

“We have been managing a flexible FX rate for 18 years now, and we have been avoiding intervening,” he said. “The exchange rate is our shock absorber.” (Additional writing by Karin Strohecker, Editing by William Maclean)

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