MercoPress. South Atlantic News Agency

Chile: Inflation contracts but interest rates are up

The strong drop in fuel prices helped contract Chile's November consumer prices index by 0,2%, with similar prospects extending to December according to the latest monthly release from the country's Central Bank.

Inflation in Chile during the first eleven months of 2005 reached 4% but 3,6% in the last twelve months.

But even when markets were expecting a fall in inflation there are concerns that the underlying tendency, which excludes perishables and fuel, could still be latently threatening.

The underlying consumer prices index, which the Chilean Central Bank follows closely as an anticipator of inflationary spurts, actually increased 0,3% in November, accumulating so far this year 2,8%.

The 0,3% positive index has been around for several months now.

"The problem with inflation is that it has been pushing for some time, it has begun to accelerate particularly the underlying index, which has been advancing steadily, and is bound to continue?" said Alejandro Fernández, an economist from Gemines Consultants.

Food prides in November were up 0,6% compared to October but transport, including fuel, contracted 2,8%. In twelve months food prices have increased 5,7%; housing 3,8%; health services 2,9%; transport 4%, with drops in clothing and household equipment.

Tomas Flores Deputy head of the Liberty and Development Institute (liberal) forecasts that inflation in Chile will peak next February at 4,7% for the twelve months and will then begin to converge to the 3% long term target of the Central Bank.

However Mr. Flores points out that the Chilean Central Bank must continue with its gradual increase of the basic interest rate in December and the first quarter of 2006, to keep inflation in line with the monetary program.

Mr. Flores estimates that the Chilean basic interest rate will climb to 5,5% by mid 2006 and 6% by December 2006.

Meantime the Monetary Policy Group which advises the Central Bank on interest rates recommended the bank to continue with its policy of gradual increases taking the December basic rate from 4,5% to 4,75%.