INTERVIEW-Chile’s Larrain sees inflation expectations easing

* Inflation expectations seen easing after budget plan

* Minister says commodity prices likely to stay high

By Louise Egan

CALGARY, Alberta (Reuters) – Chile’s announcement that it would cut government spending has already succeeded in lowering inflation expectations, the finance minister said Saturday, while predicting commodity prices will stay high for
some time.

Finance Minister Felipe Larrain said he aimed to take markets by surprise last week with a pledge to reduce the government’s expenditures by about $800 million, to “break the cycle” before markets lost faith in authorities’ ability to contain price pressures.

“After our package, we have already some signs that inflation expectations are declining,” Larrain told Reuters in an interview on the sidelines of meetings by Western Hemisphere finance officials.

“The signs are a decline in the inflation expectation that is implicit in the pricing of nominal and real interest rates,”
he said.

The fiscal package is designed to ease pressure on the central bank, which also surprised markets with an aggressive 50-point hike last week, and tame increases in consumer prices and the strong peso.

Larrain said the spending cuts were significant, the equivalent of the United States chopping $60 billion from its

As the world’s top copper exporter, Chile benefits from ravenous demand for the metal from China, its top trade partner. But it also imports virtually all of its oil, with potential impact on underlying inflation that Larrain said was his “biggest worry.”

Chile’s latest inflation numbers were relatively tame, but Larrain has repeatedly flagged oil prices as a risk to the
price outlook.

Many Latin American countries are grappling with inflationary pressures, heavy capital inflows and rising currencies as their economies heat up after the global economic crisis. Those challenges weighed heavily on finance ministers and other policy makers who met in Calgary, Alberta, on Saturday to discus the best policy response.

Larrain generally agreed with Bank of Canada Governor Mark Carney, who on Saturday said the commodity boom could last for decades because global growth is tilted toward high-growth emerging economies like China and India.

“My view is that yes, we have to factor in the probability, a large probability, that commodity levels will remain (high),”
he said. “I’m not sure if they’ll stay at the current levels but they won’t go back to the old levels.”

(Reporting by Louise Egan)