September 7, 2018 / 5:48 PM / 17 days ago

Chile central bank chief puts China, copper caveats on rate hike plans

LONDON (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.

FILE PHOTO: Chile's Central Bank President Mario Marcel speaks during a news conference to Congress in Valparaiso, Chile September 5, 2018. REUTERS/Rodrigo Garrido/File Photo

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 signaling 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 push down 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.”

U.S. President Donald Trump stirred up trade concerns again on Friday, saying he had tariffs ready to slap on a further $267 billion of China’s exports if needed and that new trade talks were to be held with Japan.

Marcel, meanwhile, said the sharp slide in the peso CLP=, against the U.S. dollar since the start of the year is serving as a buffer for the economy.

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.”

POLICY RESPONSE

Chile’s openness plus a modest fiscal deficit does make it vulnerable during dollar turbulence, but it has some clear strengths compared with some other countries.

Selling copper in dollars acts as a natural buffer to currency pressure, and its inflation rate is a tenth of neighboring Argentina’s, while its reserves look plentiful.

On top of that, 15-18 percent of its debt is dollar-denominated compared with close to 40 percent for some in Latin America and Marcel said that the country’s banks had barely any unhedged FX exposure.

He also said he expected to see little impact on Chile from the latest currency crisis in Argentina, with which it shares a long border all the way up from Latin America’s southern tip.

He said everyone who followed global markets should be concerned about Argentina, however, less than 2 percent of Chile’s trade goes there, and there is no strong linkage via their banking systems.

Brazil, where stresses are showing again, is more significant but his main concern is the drumbeat of protectionism coming from the United States and being directed primarily at Chile’s biggest copper buyer, China.

“The most relevant issue for us is China which is a big trade partner, the price of copper and of course any change in the path of monetary policy normalization in the U.S. is important.”

“But the way we look at that is how the external conditions are evolving and what should our policy response be.”

Additional writing by Karin Strohecker, Editing by William Maclean

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