Chile Central Bank decides largest interest rate hike in 20 years due to inflationary pressures

RIO DE JANEIRO, BRAZIL – On Wednesday (13), the Central Bank of Chile announced an increase in its benchmark interest rate to 2.75% per annum, the most significant increase in 20 years, in the context of inflationary pressures.

Amid a “marked and systematic” deterioration of the financial markets, the monetary authority raised the interest rate 125 basis points from 1.50% to 2.75%, in the face of a “macroeconomic scenario that has increased the risks for the convergence of inflation to the (official) target of 3%”, indicated a communiqué from the Central Bank’s Board, whose five members unanimously decided on this increase.

The rate increase, the largest since 2001, follows a 1.2% increase in the consumer price index (CPI) in September, the highest monthly figure in 13 years, for cumulative inflation of 4.4% so far this year and 5.3% in twelve months.

In contrast, the price of gasoline reached record levels after 35 consecutive weeks of increases. The rise in prices has included numerous items of the basic family basket such as transportation (2.7%), food (2.1%), and clothing and footwear (1.8%). In addition, the Chilean peso has had “a significant depreciation” against the dollar, which has hit hard the pockets of Chileans, according to the Central Bank.

Faced with this inflationary pressure, “the Board has decided to bring forward the withdrawal of the monetary stimulus.”

Although the market expected a rate increase, it came as a surprise that it exceeded estimates of an increase of between 75 and 100 basis points.

“Serious outlook”

Inflation is explained by higher liquidity following three early withdrawals of 10% of pensions that Congress approved since September 2020 to alleviate the crisis caused by the Covid-19 pandemic. It is also due to the recovery of employment and the government’s cash assistance to families due to the health emergency.

The issuing institute said that the outlook for the coming months has been rising “in a context in which two-year inflation expectations are above the 3% target.”

Chile closed 2020 with 3% inflation, but several experts warned of an “overheating of the economy” and inflationary risks if the fourth withdrawal of pension funds, currently being debated in Congress, is approved.

“It reflects how serious the inflation trajectory has become. The politicians behind the fourth withdrawal must assume their responsibility, we are facing a more serious scenario than we thought,” Alejandro Alarcón, from the University of Chile, told Cooperativa radio.

The rate trajectory will be evaluated in the next Monetary Policy Report, “bearing in mind the need to avoid a more persistent increase in inflation,” said the Central Bank.