Chile’s central bank considered raising key rate by 150 basis points at last meeting

RIO DE JANEIRO, BRAZIL – Chile’s central bank considered raising its key rate by 150 basis points earlier this month amid stronger-than-expected consumer spending before opting for a 125-point increase so as not to surprise the market, according to meeting minutes.

“The decision at this meeting had important tactical and communicational components,” monetary policymakers said. “The increase determined on this occasion could set the pace of future increases.”

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The central bank quickly rejected a 100 basis point increase as insufficient, while more seriously assessing a 150 basis point hike as consumer spending exceeded forecasts made in September. The main risk of such a steep increase was to surprise the market for the third meeting in a row, policymakers wrote in minutes released Wednesday.

Members of the board, chaired by Mario Marcel, have raised the monetary policy rate (MPR) four times in 2021 by a total of 350 basis points to 4%, the highest level in seven years, to control inflation.

However, the bank this month raised its inflation projection for 2021 to 6.9%, from 5.7% previously, and warned that rates should remain high for an extended period. According to the central bank’s forecast, price pressures are being driven by economic growth that will exceed 11.5% this year.

In the minutes, monetary policymakers reiterated that the critical rate should reach 6% in the coming months to control inflation.

“Given the evolving macroeconomic scenario and its risks, the key rate must move toward a restrictive level,” the central bank’s advisors wrote.

Workers, flush with liquidity thanks to early pension withdrawals and emergency aid during the pandemic, have boosted demand for goods from food to cars. Meanwhile, this month’s election of leftist Gabriel Boric as president caused the peso to weaken, which approached a record low before paring some of the losses. A weaker peso increases the cost of imports.

Boric won proposals for better social services, such as health, education, and pensions, which economists fear could jeopardize fiscal stability. Still, after winning the election, Boric reiterated his commitment to fiscal responsibility.

In November, annual inflation in Chile soared to 6.7%, the highest level since 2008. Both economists and traders surveyed by the monetary authority estimate that price growth will be above the target for the next two years.

According to the central bank, economic growth in Chile will slow to between 1.5% and 2.5% in 2022.

With information from Bloomberg