20 October 2009

Chile to Pause for ‘Prolonged Time,’ De Gregorio Says

By Nathan Gill
Oct. 20 (Bloomberg) -- Chilean central bank President Jose De Gregorio said policy makers will keep the overnight lending rate at its record low for a “prolonged time.”

De Gregorio has said he plans to hold borrowing costs down in an effort to stoke economic expansion faster than 4.5 percent, which would likely push inflation back up toward policy makers’ 3 percent target. Prices fell 1.1 percent in the 12 months through September, the steepest decline since the 1930s.

Consumer prices have fallen for two consecutive months on an annual basis, reinforcing the bank’s forecast that interest rates won’t need to be raised until the second quarter of 2010, De Gregorio said today at a conference in Santiago.

“Indicators such as demand, production and expectations show an outlook that is coherent with the recovery in economic activity forecast for the current half,” De Gregorio said. “It’s expected that as of the second quarter next year, rates will begin to rise gradually and to return to normal levels.”

Chile’s main stock index, the Ipsa Index, is trading near record levels after rising more than 45 percent this year on optimism about economic growth. Empresas La Polar SA, Chile’s fourth-largest retailer by market value, and real estate developer Socovesa SA have more than doubled this year.

Chile’s economy shrank in the first two quarters of this year after prices for its exports, led by copper, plunged and domestic demand evaporated.

Borrowing Costs

After ramping up the cost of borrowing to a 10-year high last year as inflation reached 9.9 percent, the central bank lowered its overnight rate by 7.75 percentage points this year, a reduction exceeded only by Turkey.

Consumer prices will fall this year and inflation will return to the bank’s target rate in the “mid-term,” De Gregorio said. Demand should recover this year and the labor market shows stability, he said.

“Chile’s economy appears to be on the path to recovery, but there are still risks,” De Gregorio said in his presentation. “Prior experience teaches us that the removal of monetary stimulus should be done carefully to avoid incubating inflationary or deflationary pressures that increase the cost of an adjustment.”

Chile’s peso strengthened 0.3 percent to 543.53 per U.S. dollar at 1:18 p.m. in New York, from 545.29 yesterday.