Chile Peso Gains on Expectations Central Bank Will Raise Rates

Sept. 24 (Bloomberg) -- Chile's peso rose on speculation the central bank will boost its benchmark lending rate next month for the fourth time since July to curb inflation.

An increase would widen Chile's interest-rate advantage over the U.S., helping lure capital to the South American country's debt. The U.S. Federal Reserve last week slashed its benchmark rate a half-percentage point to 4.75 percent. Chile's key rate is currently 5.75 percent. The country's annual inflation rate jumped to a nine-year high in August.

``The central bank has to keep hiking rates in the face of the Fed cutting rates, and the increase in the spread should be supportive of the peso,'' said Matthew Festa, an economist at research firm 4Cast Inc. in New York.

The peso rose 0.2 percent to 512.62 per dollar at 2:56 p.m. New York time, leaving it within 1 percent of a 21-month high reached last week. The peso is up 3.8 percent this year.

Chile's inflation rate was 4.7 percent in August, sparked by a surge in commodity prices, up from a 3.8 percent rate in July. Crude oil prices are up 33 percent from a year ago, and touched a record high last week. Copper, Chile's largest export, closed at its highest level in almost eight weeks today.

The increase in the price of commodities, specifically oil, is ``an inflation time bomb waiting to happen,'' said Festa.

Industrial production, an indicator of economic growth, probably grew at a 5.1 percent annual rate in August, after 4 percent growth in the previous month, according to the median forecast of nine economists in a Bloomberg News survey. The Chile National Statistics Institute in Santiago is scheduled to release the data on Sept. 27.

Chile's central bank last raised the benchmark rate on Sept. 13 by a quarter-percentage point.

Fed fund futures show traders see a 72 percent chance the Fed will cut the benchmark lending rate to 4.50 percent at its next meeting, scheduled for Oct. 31.

The yield on Chile's benchmark 8 percent bond due June 2015 was unchanged today at 6.30 percent, according to HSBC Bank USA Chile.