Chile's De Gregorio May Raise Rate to 7.25% to Stem Price Rises

By Sebastian Boyd

July 10 (Bloomberg) -- Chile's central bank President Jose De Gregorio will probably raise the benchmark rate to a nine- year high today in a bid to slow inflation to policy makers' target within the next year.

Twenty of the 22 economists surveyed by Bloomberg expect the bank to raise the reference rate, including 15 who forecast a half percentage-point increase to 7.25 percent. Two economists expect the bank to keep the rate unchanged at 6.75 percent and two expect a quarter-point increase.

Policy makers have raised the overnight rate six times in the last year, including a half-point increase last month, as they seek to slow the fastest inflation in Chile in more than a decade to their target of 2 percent to 4 percent.

``The inflation numbers were really bad and the bank has already signaled it is concerned,'' said Rodrigo Valdes, chief Latin American economist at Barclays Capital in New York. ``They have to save some bullets for later, so what I would expect is 50 basis points and a strong statement for the future.''

Consumer prices in the $173 billion economy rose 9.5 percent in the year through June, the fastest pace since 1994, and almost triple the 3.2 percent rate of June 2007.

Among South American economies, Venezuela, Ecuador and Bolivia have higher inflation rates. Argentina in May registered annual inflation of 9.1 percent, though some analysts and former Economy Minister Roberto Lavagna dispute the number and say the real rate is more than twice that amount.

Consensus

Food prices in Chile rose 2.3 percent in June, compared with a 1.9 percent climb in May, pushing the annual rate for food to 19.5 percent. Food accounts for about a quarter of Chile's consumer price index.

Record global oil prices have led to a surge in transport costs because Chile imports almost all of its petroleum needs. Transport prices rose 3.6 percent and 2.3 percent in June and May respectively.

Core inflation, which strips out more volatile food and energy prices, rose 8.7 percent in the 12 months through June.

Faster inflation will prompt the central bank to raise its target interest rate by half a percentage point tomorrow and by a further half point before the end of the year, according to a monthly central bank survey of economists published yesterday.

The median of 36 forecasts in the bank's July 2-8 survey showed that economists expect a year-end inflation rate of 7.5 percent, compared with 5.5 percent in the bank's June survey.

New York-based Credit Suisse economist Alonso Cervera on July 8 raised his year-end inflation forecast to 7.7 percent, up from 5.4 percent.

`Do Something'

De Gregorio warned on July 2 that he couldn't rule out further rises and that inflation would be faster than the bank had forecast in May. Expectations of price rises fed into price and salary adjustments, creating further inflation, he said.

``They have to do something about inflation expectations,'' said Julio Espinoza, an economist at Banco Bice in Santiago, who expects a half-point increase.

Two analysts in Bloomberg's survey of economists expect the bank to raise the benchmark rate by three-quarters of a percentage point to 7.50 percent tomorrow, while Leonardo Suarez, an economist at Larrain Vial SA in Santiago, expects the bank to raise by a full percentage point.

``The question is whether a half-point increase is enough, or should they accelerate,'' said Alberto Ramos, an economist at Goldman Sachs Group Inc. in New York.

To contact the reporter on this story: Sebastian Boyd in Santiago at sboyd9@bloomberg.net