Chile: Central Bank implements a further aggressive rate hike in October
October 13, 2021
At its 13 October meeting, the board of the Central Bank of Chile decided to hike the monetary policy rate by 125 basis points to 2.75%, a larger increase than markets were anticipating. Rates have now risen by 225 basis points so far this year.
A desire to rein in surging inflation was chiefly behind the Bank’s move. Inflation rose to a multi-year high in September, spurred by high international commodity prices and strong domestic demand, and is currently way above the Bank’s 3.0% target. Inflation expectations also rose as a result. Moreover, a potential fourth withdrawal from the country’s pension funds has the potential to further stoke price pressures. The decision to hike could have also had one eye on stabilizing the peso, which has tumbled in recent months amid intensifying political uncertainty.
The Central Bank sounded an even more hawkish tone than at its prior meeting, noting that the “policy rate will reach its neutral level sooner than foreseen in the September Report’s central scenario”. In September, the Bank had estimated a return to neutral territory (in the 3.25%–3.75% range) by the end of Q1 2022. As such, rates are set to continue increasing rapidly going forward, with more tightening likely at the next meeting on 14 December.
Author: Oliver Reynolds, Economist