MercoPress. South Atlantic News Agency

Chile basic rate up; consumer confidence at its lowest

Chile Central Bank bulding

Chile's Central Bank raised its target interest rate by 50 points last week to 7.25%, the highest level since February 1999. Citing the need to pull back inflation to its 3% policy goal, the bank raised the monetary policy rate (TPM) for the third time in 2008.

"In today's global environment, the outlook for developing economies remains weak and international financial markets continue to tense," reported the Central Bank. "The price of petroleum has continued to rise, while the prices for most basic products have risen again". The Central Bank had projected a 3.8% annual inflation rate in previous forecast. But this goal was scrapped by June's report of a 9.5% annual price jump in May. While acknowledging that increasing interest rates could push up domestic prices, especially for imported goods, the bank hinted that more rate hikes might follow later this year. "In the most likely scenario, there will be necessary additional adjustments to assure inflation converges to the rate we have targeted," the bank said. Some economists predict that the interest rate may continue to rise to at least 8% by the end of 2008. Meanwhile, consumer confidence dropped in June to a five-year low in the face of rising inflation and slowing growth rates, the Center of Public Studies (CEP) reported on Thursday. Pessimistic sentiments jumped 10 points since December, with 45% of the population thinking the economy is in "bad or very bad shape," compared to 13% who said it was "good or very good shape." Economists say that the Central Bank's decision to raise rates will inevitably make loans more expensive for consumers, dragging down demand for more expensive, longer-lasting consumer durable goods like cars, furniture and houses. The Central Bank needs to prevent this slowdown in demand, paired with deterred investment on the part of producers, from leading to a spiral of stagnating growth, they said. The higher new interest rate has already taken its toll with loan prices on customer loans at banks like BCI, whose 36-month loans for 1 million Chilean pesos (roughly US$1,987), which would have cost 1.25% a month to pay back, jumped to 2.6% last week. Inflation has not reached double digits in 14 years, but over a quarter of Chileans believe the worse is yet to come. After crime, education, health and wages, Chileans believe rising prices are among the biggest problems facing its country today. Thirty percent of citizens said the government should dedicate greater efforts to tackling inflation, versus the 17% who said so in December 2007, back when inflation was 7.8%. Former Chile Central Bank President Carlos Massad said the current administration "lingered" too long before taking action against rising inflation and could have taken action when inflation was evident "some time ago." "When inflation is already here, there is no way to contain it without costs," Massad told Radio Cooperativa. The Santiago Times