Chile raises rate 5th time, significant risks to inflation

January 27, 2022

Chile’s central bank raised its policy interest rate for the fifth time, saying there are still significant risks of higher inflation as the most recent data on economic activity and inflation are somewhat above the latest forecast in December at the same time inflationary pressures from abroad have increased.
The Central Bank of Chile (CBC) raised its monetary policy interest rate by 1.50 percentage points to 5.50 percent and has now raised it 5 percentage points since it began raising rates in July 2021.

It is the first time in the current monetary tightening cycle CBC has raised its rate so sharply but minutes from its December meeting showed a 150 basis point rate hike had been considered before the board decided on a 125 point rate hike, as in October and December last year.

The bank’s board was once again unanimous in its decision although the current governor, Mario Marcel, did not participate after being picked last week as finance minister by Chile’s President-elect Gabriel Boric.

The departure of Marcel from comes only three months after he was named for a second 5-year term as governor of the central bank.

“The risks for the evolution of inflation continue to be significant and its eventual materialization becomes especially relevant in a context in which both the annual variation of the CPI and its prospects are already high,” CBC said, adding the decision was consistent with a rate trajectory that would be around the upper edge of the rate corridor outlined in the December policy report.

In December the central bank raised its inflation forecast for 2021 to 6.9 percent from an earlier 5.7 percent and the 2022 forecast to 3.7 percent from 3.5 percent, and has said the policy interest rate would need to reach as much as 6 percent to curb inflation.

Chile’s inflation rate rose to a 2021-high of 7.2 percent in December, the highest since 2008 and more than twice the central bank’s 3.0 percent target.

Chile’s economy has recovered swiftly from the COVID-19 pandemic and CBC said activity and demand was consistent with the upper range of its forecast for 2021.

In December CBC raised its estimate of 2021 economic growth to between 11.5 and 12.0 percent with growth then seen slowing to 1.5 to 2.5 percent in 2022.

The Central Bank of Chile released the following statement:

“At its Monetary Policy Meeting, the Board of the Central Bank of Chile agreed to increase the monetary policy interest rate by 150 base points, up to 5.5%. The decision was adopted unanimously by the Directors present.

Externally, the world economy has lost some of its dynamism, but the outlook for the year shows no major changes. The rise in Covid-19 infections has been significant in many countries and although a decrease in mobility has been observed, its effects on activity have been limited. In any case, the risks around China increase due to the greater intensity of the restrictions and their potential impact on the persistence of bottlenecks at a global level. Inflation has continued to rise in various economies, with central banks intensifying the move towards withdrawing monetary stimulus. Geopolitical risks have increased, especially in Europe. In this context, financial markets report a cross-sectional rise in long-term interest rates, the appreciation of a significant number of currencies against the dollar and falls in stock markets, particularly developed ones. In turn, the price of a barrel of oil has risen significantly, reaching around US$85 a barrel (+19% since the last Meeting, for the WTI-Brent average), while the price of copper stands at around US$4.5 a pound.

The evolution of the Chilean financial market has been marked by both external and internal factors, although with a predominance of the latter, possibly associated with a decrease in internal uncertainty. Since the previous meeting, the peso appreciated about 5%, the stock market rose around 5%, long-term interest rates, although with ups and downs, are at similar levels and the country risk (CDS) fell back close to 10 basis points (bp). On the other hand, short-term interest rates rose in response to higher effective inflation and higher monetary policy rate expectations. In any case, the levels of uncertainty continue to be high in historical comparison and long-term interest rates maintain a relevant differential with respect to their external peers.

In the aggregate, the activity and demand indicators are consistent with the upper part of the projection range for 2021 considered in the December Report. In November, activity increased 14.3% annually —0.3% monthly for the seasonally adjusted series—, highlighting the contribution of service activities and, to a lesser extent, commerce. In demand, the sustained dynamism of imports of all types of goods stands out. Private expectations (EES) continue to predict GDP growth rates of around 2% for 2022 and 2023. The labor market continues to show a gradual recovery, with a supply that remains contained by households and high levels of demand for company work. Bank credit, in general, maintains a limited dynamism, prevailing demand factors.

The annual variation of the IPC reached 7.2% in December, exceeding market expectations and the projection of the last Report. The rise in prices was generalized among the different items in the basket. Once again, the increase in core inflation —CPI without volatiles— stands out, standing at 5.2% annually, driven by both the prices of goods —which surprised on the rise— and services. In the volatile component, the contribution of fuels and the evolution of some specific items continued to stand out. Private inflation expectations remain above 3% two years ahead.

The risks for the evolution of inflation continue to be significant and its eventual materialization becomes especially relevant in a context in which both the annual variation of the CPI and its prospects are already high. In particular, the recent evolution of activity and inflation is somewhat above what was forecast in the December Report and the inflationary pressures derived from the international scenario have increased. The Board’s decision is consistent with a monetary policy trajectory that, in the short term, would be around the upper edge of the rate corridor considered in the last Report. A new evaluation of this will be carried out in the next Report.

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The minutes corresponding to this Monetary Policy Meeting will be published at 8:30 a.m. on Thursday, February 10, 2022. The next Monetary Policy Meeting will be held on Tuesday, March 29, 2022 and the respective statement will be published as of 6 p.m. that day.”

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