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Chile Monetary Policy January 2022

Chile: Central Bank implements a further aggressive rate hike in January; more tightening likely ahead

At its 26 January meeting, the board of the Central Bank of Chile decided to hike the monetary policy rate by 150 basis points to 5.50%. The move followed 350 basis points of hikes delivered in 2021.

The Bank’s move was driven by a desire to keep inflation and inflation expectations in check. Inflation rose to an over-decade high in December, spurred by elevated international commodity prices and strong domestic demand. Moreover, the Bank highlighted that inflation expectations are now above the 3.0% target over a two-year horizon, and that risks to the inflation outlook are considerable, as both economic activity and price pressures have recently been stronger than forecast in the Bank’s December monetary policy report.

In its communiqué, the Central Bank stated that the policy rate was likely to rise in the near term towards the upper bound of the interest rate corridor outlined in December’s monetary policy report—close to 7.00%.

On the outlook, Guillermo Diaz, economist at CAF, said:

“We expect two increases of 50bps in the next two meetings and then a pause. We think that inflation pressures due to demand will moderate from the middle of the second quarter. However, the bias of our forecast is upwards.”

Alejandro Fernández Beroš, economist at Gemines, was more hawkish:

“Monetary policy will be more restrictive in the coming months, with cumulative hikes of 150 to 200 basis points between March and June (probably in March and May). After that, with clear evidence of a slowdown in economic activity, it will enter a waiting period.”

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