Chile tightens monetary policy

Chile, which has bounced back more strongly than expected from a devastating earthquake at the end of February, has hiked its key lending rate by 50 basis points, becoming the latest country in the region to start reining in monetary stimulus measures after recent rate rises by Peru and Brazil.

The half-point hike, to 1 per cent, was at the top end of market expectations, wrongfooting many who had expected the bank to take a more softly-softly approach.  The key lending rate had been at a record low of 0.5 per cent since July 2009 and the bank had not raised the rate since September 2008, when it was 8.25 per cent.

The tightening comes after the economy in the world’s top copper-producing nation grew at its fastest rate since 1996 in April, and inflation reached an 11-month high – confirming that the 8.8 magnitude quake, which caused an estimated $30bn damage to housing, infrastructure and key industries including forestry and fruit farming, had dealt a shorter and shallower blow than had initially been feared.

The bank noted that there was continued financial market volatility, but said it expected the debt crises in parts of the eurozone to have only a limited impact on the global economy. Meanwhile domestic data confirmed that “the immediate effects of the earthquake dissipated rapidly and the economy resumed the path of recovery. Indicators of demand are showing significant dynamism and unemployment has continued to fall,” it said.

As such “the board considered appropriate to begin withdrawing the significant prevailing monetary stimulus and will continue to do so at a pace that will depend on the evolution of domestic and external macroeconomic conditions, ” the bank added  in a statement.

It stressed that it would continue to use interest rates “flexibly” to bring inflation in line with 12-to24 month target of 3 per cent, plus or minus one percentage point.

The central bank had indicated in the minutes of its May meeting that rate “normalisation” was imminent. Central banks in the region have begun withdrawing monetary stimulus to avoid stoking inflation as economies recover and demand rebounds. A central bank survey of analysts this month found expectations for inflation in Chile of 3.5 per cent by the end of this year, above the bank’s goal.

The central bank analysts’ poll pointed to an expected interest rate of 2.5 per cent by the end of the year, a level still widely seen as stimulative.

It also revealed a marked improvement in sentiment as the median second-quarter growth forecast rose to 4.5 per cent, compared with 3 per cent a month earlier.

Chile has rebounded spectacularly from its worst recession in a decade in 2009, when the central bank slashed 775 points of its key rate to help propel recovery, and is on course for growth in the second half of as much as 7 per cent, according to a new survey of 20 banks and consultancies conducted by El Mercurio newspaper.

In April, just over a month after the 8.8 magnitude quake struck south-central Chile, the economy surged 4.6 per cent. Economists polled by the central bank are pencilling in growth of 4.5 per cent this year. The central bank will publish its own amended forecasts this week.