Chile's interest rate is at a neutral level and has no directional bias, due to an uptick in inflation and a softer than expected slowdown, central bank president Rodrigo Vergara told a local newspaper's Sunday edition. The bank cut the key rate for the first time in 2 1/2 years in January, citing global economic risks, but CPI spikes have bolstered market bets the rate will be kept at 5 percent in coming months and even raised by year-end.
"It wasn't a mistake to cut rates in January... A 5 percent rate keeps up within a neutral range so it's not like we're in an expansionary monetary policy phase either," Vergara told La Tercera. "We don't see one (rate) direction as more likely than another right now."
Chilean consumer prices jumped a surprise 0.4 percent in February, fuelled by food and transport costs, keeping annual inflation above the 4.0 percent ceiling of the central bank's tolerance range for a third straight month. "If we see that inflation risks increase more, we won't hesitate to take the necessary monetary policy decisions," Vergara said. "But today we don't see that as the most likely scenario."
Inflation during the first half of this year will be about 4 percent but later will ease to near the bank's 3 percent target, he said. Vergara said earlier this month that brisk domestic demand likely will heighten price pressures.
Higher fuel costs and increases in fruit and vegetable prices due to the country's third annual drought are further triggering inflation but are momentary factors, he told La Tercera. The Chilean peso currency is trading at levels consistent with its long-term fundamentals and equilibrium, Vergara said, adding a currency intervention is only warranted under extraordinary circumstances.
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