Chile Prices Rise More Than Forecast Before Key Rate Decision

(Bloomberg) -- Chilean consumer prices rose more than expected last month and the central bank warned of the inflationary impact from higher copper and electricity prices, bolstering odds of a smaller interest rate cut in June.

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Prices increased 0.3% from April, marginally above the 0.2% median estimate from analysts in a Bloomberg survey. The annual inflation rate ticked up to 4.1% in the chained series, the national statistics institute reported on Friday.

Minutes later, central bankers warned of the impact of several upcoming hikes in domestic electricity rates, which would be “greater than those considered in the current central scenario.” Policymakers also said in the minutes of the last rate meeting that they would be watchful of the economic impacts from rising prices of copper, which is Chile’s top export.

“In the short term, the lower exchange rate could ease inflationary pressures,” they wrote. “Into the medium term, this could be more than offset by the greater dynamism of activity.”

Two-year swap rates, a gauge of interest rate expectations, rose 9 basis points in morning trading following the inflation report.

Chilean policymakers led by Rosanna Costa are expected to slow the pace of interest rate reductions at their June 18 decision, delivering a quarter-point move. Still, despite the inflation headwinds, the monetary authority still sees consumer-price growth slowing to the 3% target next year.

“The May inflation data mean that the odds are shifting toward a 25bp cut — rather than the 50bp we’d been expecting — at the next meeting on 18th June,” Jason Tuvey, Deputy Chief Emerging Markets Economist at Capital Economics, wrote in a note.

Transportation costs increased 0.6% on the month in May on higher fuel prices, while clothing jumped 1.9%, according to the national statistics institute. On the other hand, utilities fell 0.3%.

The annual inflation rate has picked up in the last two months, reflecting the effect of higher global transportation costs and currency depreciation at the start of the year. The peso has since recovered some of those losses, gaining over 7% in the past three months on higher prices of copper.

Going forward, electricity costs will be under pressure after Congress passed legislation in April laying out gradual increases to tariffs that had been held down since a wave of social unrest in late 2019. Meanwhile, subsidies will be made available to vulnerable households.

Chile’s central bank sees annual inflation at 3.8% in December and 3% at the end of 2025, according to estimates published in April. Traders surveyed by the monetary authority see consumer-price growth at 3% in 12 months.

--With assistance from Giovanna Serafim.

(Updates with comments from central bank minutes in third and fourth paragraphs, economist quote in sixth)

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