MercoPress. South Atlantic News Agency

Booming Chile hikes basic interest rate to 4,25%

In line with market expectations the Chilean Central Bank Council agreed Tuesday in its monthly meeting to increase the basic interest rate 25 points to 4,25%.

The Council argued that the economy is growing faster than expected, although in recent weeks a slight deceleration has been recorded.

"Domestic demand remains with strong dynamism, more notorious in investment than in consumption, employment keeps increasing at high rates and monetary conditions are clearly expansive. In spite of higher oil prices and greater risks of international inflation, overseas conditions are extremely favourable with a persistent high price for copper, favourable financial conditions and prospects of sustained world growth".

However the bank also points out that September's inflation was surprisingly high because of specific prices, particularly energy and some perishables, with inflation reaching a 4% threshold before expected. However core inflation (excluding fuel, perishables and some regulated public services) has kept advancing in line with targets.

"Inflation expectations for horizons of two and more years remain in the range of 3% annually. This is coherent with a temporary inflation bout and with convergence of the inflationary tendency towards the mid objective programmed in the last Monetary Policy report".

Finally the Central Bank Council considers that the most probable scenario is of a reduction in the prevalent monetary stimulus, in such a way that ensures annual inflation in the range of 3% for the normal policy horizon of 12 to 24 months.

At the beginning of the week copper registered a new record price in London's Metal Exchange reaching 1,87 US dollars a pound, surpassing the most optimistic expectations. Labour disputes in Canada and Zambia, plus a bull demand do not discard that copper might break the threshold of 2 US dollars a pound in the coming weeks.

The Chilean Mining Society also decided to increase the basic average price for 2005 taking it to 1,60 US dollars the pound (in September it averaged 1,75 US dollars), which represents a 25% increase over last year.

For each US cent copper price increases, Chile receives an additional 120 million US dollars.

The Chilean Central Bank also revealed that the country's total foreign debt stood at 44,6 billion US dollars August 31, 1,34 billion higher than December 2004. Of the total, 33,4 billion US dollars are private sector and 9,2 billion public sector. Long term debt stands at 36,8 billion US dollars and short term, 7,7 billion. Of the 33,4 billion from the private sector debt, 28,5 billion belong to companies, 6,6 billion to banks and the rest mainly to consumers.