SANTIAGO: Chile's central bank on Thursday raised its benchmark interest rate by a bigger-than-expected 50 basis points and said more hikes will follow as it prioritizes the fight against high inflation over a strong currency.
The aggressive rate hike to 4.0 percent will likely add more upward pressure on the peso, which has rebounded from the initial impact of a $12 billion central bank currency intervention launched in January.
The statement notably made no reference to the peso, which has recently weakened as the price for copper, Chile's main export, retreated from lifetime highs and the cost of imported fuel and food rose on Middle East unrest and Japan's earthquake and nuclear crisis.
The rate decision caught Chile's market off guard, with 12 of 15 analysts polled by Reuters on Thursday expecting a more moderate 25-basis-point increase. Chilean interest-rate futures and central bank surveys also pointed clearly to a 25- basis-point increase.
"The bank put more weight on the divergence of inflation expectations and did not factor in the possible implications of Japan's earthquake," said Nathan Pincheira, an analyst with Banchile Inversiones.
"Its target is inflation, not the exchange rate," he added inflation expectations breached the bank's 2 percent to 4 percent annual inflation target.
"Higher global commodity prices, in particular, oil, have led to a rise in private short-term inflation expectations," the bank said in a statement.
Chile is one of a host of emerging market economies from Brazil to China that have raised rates this year to fight inflation fuelled by higher global prices for food and commodities.
The bank also made clear there will be more rate hikes to come.
"The Board reiterates that it will be necessary to continue to reduce the monetary stimulus in the coming months," it said in its statement.
The rate decision came a day after the central bank cited a significant increase in short-term inflation expectations, as well as strong demand that it said could signal economic growth of over 11 percent in March from a year earlier, when activity was hammered by a devastating earthquake in Chile.
"The central bank is prioritizing the internal dynamic of economic growth and price transfers from rising crude," said Valentin Delano, chief economist at the Cruz Del Sur brokerage.
"This isn't considered in current market prices, so there should be some short-term correction to the exchange rate and probably a drop in long term market rates."
The central bank had also surprised the market in January by holding rates steady after seven straight increases, complementing the currency intervention. The bank held the rate at a record low of 0.5 percent for almost a year from mid-2009 to help the economy recover from the global financial crisis and a devastating quake that hit Chile a year ago.
Chile's rates peaked at 8.25 percent in late 2008.
The bank resumed its cycle of rate increases last month as annual inflation forecasts hit the upper end of its target range.
Chilean inflation slowed in February, when the consumer price index rose 0.2 percent as expected, driven mostly higher by jumps in clothing and transport costs, but prices are seen jumping around 0.7 percent in March.
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