Chile: Central Bank implements aggressive rate hike in August
August 31, 2021
At its 31 August meeting, the board of the Central Bank of Chile decided to hike the monetary policy rate to 1.50% from 0.75%, following a 25 basis-point hike at the prior meeting in July. The increase was larger than markets were anticipating.
A stronger-than-expected performance of the economy recently and mounting inflationary pressures were behind the Bank’s move. June’s index of economic activity reading was notably stronger than analysts were expecting, with the economy showing an increased resilience to lockdown restrictions and large fiscal stimulus bolstering private consumption. The loosening of lockdown restrictions since July is also likely to fuel activity ahead. The strong economic performance contributed to inflation rising further above the Bank’s 3.0% target in July, with core inflation and short-term inflation expectations also increasing. As such, the Bank felt that further monetary tightening was necessary in order to stop the economy from overheating and to ensure inflation returns to target.
The Central Bank made clear that further hikes are likely in the near term, stating that “for inflation to converge to the target it will need to continue to withdraw the monetary impulse, bringing the MPR at levels similar to its neutral towards the middle of the first semester of 2022.” This is a marked departure from the previous guidance that the policy rate “will be below its neutral value throughout the two-year policy horizon”. In June, the Bank estimated the neutral rate to be in the 3.25%–3.75% range.
Alejandro Fernández Beroš, head of research at Gemines, commented:
“It is clear that the Central Bank is very concerned about the future evolution of inflation and the factors that could continue to drive it, basically public spending and withdrawals from pension funds. […] In principle, the MPR would rise in the four meetings until June of next year, by 25bp each time. Notwithstanding the above, the level of uncertainty is very high. […] My impression is that reaching the neutral TPM level may take longer, perhaps until the end of 2022.”
The next monetary policy meeting is scheduled for 12–13 October.
Author: Oliver Reynolds, Economist