SANTIAGO: Chile's central bank on Tuesday raised its 2012 economic growth and inflation forecasts as a slowdown on the back of euro zone woes in the world's top copper producer appears milder than feared, and reiterated its benchmark interest rate is at levels neutral to the economy.
The bank hiked its 2012 inflation expectations to 3.5 percent from a previous 2.7 percent view, which could put pressure on board members to consider raising rates that are so far seen held at 5.0 percent in coming months.
Chile's economy is now seen expanding between 4.0 and 5.0 percent this year, up from a previously forecast 3.75 to 4.75 percent range, the bank said in its Quarterly Monetary Policy Report. Chile gross domestic product growth is still seen slowing significantly from last year's 6 percent expansion.
"Activity and demand have grown above forecast ... in part because the external scenario has been less adverse than anticipated," said the bank's report, known by its Spanish acronym as the IPoM, adding that interest rates should follow a trajectory similar to what financial assets indicate.
"The (central bank) board see rates currently within a range neutral to the economy's expansion," the report said.
In monetary policy parlance, a neutral interest rate is one that is seen neither spurring nor curbing economic growth.
In mid-March, the bank said that expectations derived from the prices of financial assets forecast the first rate hike toward the end of the year, following recent higher-than-expected inflation readings.
The central bank has held the key interest rate at 5.0 percent since a surprise 25 basis points cut in January, the first reduction in 2-1/2 years, which came on fears of fallout from the euro zone's debt crisis.
Those fears have somewhat dissipated, as the bank said "several of the risks contemplated in the previous IPoM (in December) have been reduced."
A drop in consumption in China, the world's top metals consumer, is especially feared in Chile, which produces a third of the world's copper.
"While short-term inflation risks have increased, risks from the external scenario continue to be important and their realization could have significant effects on the Chilean economy," the bank's report said. "Therefore, the complex scenario requires a prudent monetary policy."
The recent rise in consumer prices, which has kept 12-month inflation above the ceiling of the central bank's 4.0 percent tolerance range, coupled with strong economic activity, domestic demand and unemployment data, has underscored a milder-than-feared slowdown in Chile's small, export-dependent economy.
The central bank also raised its view for domestic demand growth in 2012 to 5.3 percent from its previous 3.7 percent forecast, saying that a downward trend in domestic demand growth will be more paused than what was forecast in the previous IPoM.
"Domestic demand has shown high rates of annual variation, although (it is) decreasing. The same has happened with consumption, supported by the strength of the labor market," said the bank's report.
A sharp drop in unemployment has helped to fuel domestic demand. Chile's jobless rate for the December-February period fell sharply to a lower-than-expected 6.4 percent, as retail employment picked up, the National Statistics Institute said on Friday. The data represents a near five-year low after a similar 6.4 percent rate posted in July 2007, which was calculated by the government using a different methodology.
The central bank upped its forecast for this year's average price of the country's top export copper to $3.7 per pound from the $3.5 forecast in December of last year. Average copper prices are seen dipping to $3.6 per pound next year, the bank said.
The bank, however, decreased its forecast for this year's trade surplus to $4.0 billion from its previous estimate of $4.8 billion.
Regarding the country's peso currency, the central bank highlighted that it had strengthened around 6 percent against the dollar since December's IPoM, helped by a recovery in copper prices and a more upbeat global economic outlook.
"We estimate the real exchange rate is within a range of values coherent with its long-term fundamentals," the bank said.
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