World Economy

Chile Inflation Above Expectation

Chile Inflation Above ExpectationChile Inflation Above Expectation

Chilean inflation accelerated more than analysts expected in January as the peso hit a 13-year low and the government raised stamp duty, keeping pressure on the central bank to continue raising interest rates.

Consumer prices rose 4.8% from the year earlier, the National Institute of Statistics said Monday in a report on its website, compared with the 4.6% median forecast of 14 analysts surveyed by Bloomberg.

In the month, consumer prices gained 0.5% and core prices leaped 0.9%, almost double the 0.5% forecast by analysts.

Inflation has exceeded the central bank’s target range in 19 out of the past 22 months as a decline in the peso pushes up the cost of imports. The pressure on prices has led the central bank to raise interest rates twice since October, the first increases in more than four years, and signaled that there are more to come.

Inflation in January was driven by a doubling in stamp duty on financial transactions, excluding mortgages, to 0.8%, the central bank said.

“We knew there would be a big rise in January, a one off,” said Miguel Ricaurte, chief economist at Banco Itau Chile. “The central bank is interested in inflation within the target range by year-end and this number doesn’t change that forecast. We think it will end 2016 at 3.5%.”

Still, traders adjusted their expectations of inflation up after the data. They are now pricing in the likelihood inflation will average 2.87% over the next five years, an increase of four basis points from Friday, based on the gap between yields of fixed-rate and inflation-linked debt known as the break-even rate. Inflation expectations for the next year increased 14 basis points to 3.51%.

Two-year interest rate swaps advanced 7 basis points, the most in two months, to 3.92%. The 5-year interest rate swap increased 6 basis points to 4.24%. The Chilean peso weakened 0.6% to 708.89 per dollar.

Inflation is expected to slow later in the year as economic growth remains weak. The central bank targets inflation of 2% to 4%.

Economic activity rose 1.5% in December from the year earlier, the central bank reported Friday, bringing growth for the full year to about 2%. Finance Minister Rodrigo Valdes told CNN Chile last week that the government’s forecast for growth this year of 2.75% was very high, indicating the authorities will reduce the estimate later in the year.

 Trade Balance Surplus

Trade figures posted a surplus of $685 million in January. This was driven by exports at $5.12 billion (-14.1% YoY, again due to declines in mining and manufacturing) and imports at $4.44 billion (-12.0% YoY), FXStreet reported.

Despite the 19.6% YoY increase in capital goods, the measures that exclude transportation remain sluggish, and the overall imports are still showing weakness in private consumption with yearly declines in both durable and non-durable goods.

Overall, January’s aggregate activity figures will remain weak.