Chilean Central Bank raises benchmark rate from 4% to 5.5% due to inflation

RIO DE JANEIRO, BRAZIL – The Central Bank of Chile resolved on Wednesday to raise the benchmark interest rate by 150 points to curb inflation, which in 2021 reached 7.2%, its highest figure in 14 years.

Unanimously and above the markets’ expectations, the issuer’s board increased the so-called monetary policy rate (TPM) from 4% to 5.5%, its highest level since 2011.

“Risks to the evolution of inflation remain significant, and their eventual materialization becomes particularly relevant in a context in which the annual variation of the CPI and its outlook are already elevated,” the bank explained.

Shortly after the coronavirus broke out in Chile in March 2020, the bank made a drastic rate cut to the historic low of 0.5%.

The increase in the TPM began in July when the agency raised it by 25 points, and the pandemic was starting to overcome, and then adjusted it to 1.5% in August, to 2.75% in October, and 4% in December.

According to experts, the increase announced on Wednesday is the most important movement since the nominal TPM exists.

The economic aid provided by the Chilean government to alleviate the impact of the pandemic, as well as the three early withdrawals of 10% of the pension funds approved by Parliament also to face the crisis, considerably boosted consumption.

Inflation has been soaring for months, and there is growing concern among authorities and consumers, although it is a situation shared in most countries.

Chile closed 2021 with cumulative inflation of 7.2%, the highest in 14 years after prices rose an unexpected 0.8% in December.

With most of its population vaccinated, Chile is leaving behind the worst moments of the pandemic, which led the economy to contract by 5.8% in 2020, the worst drop in four decades, and caused the loss of almost 2 million jobs.

The recovery has been faster than expected, and the Central Bank estimates GDP growth for 2021 of up to 12% and between 1.5% and 2.5% for this year.

Wednesday’s meeting is the first without Mario Marcel at the helm, the issuer’s president since 2016 until he resigned last week when he was appointed as the next finance minister of President-elect Gabriel Boric.

With information from EFE