Chilean Central Bank raises key rate to 0.75% after a year and a half at minimum levels

RIO DE JANEIRO, BRAZIL – The Central Bank of Chile decided on Wednesday (14) to raise the benchmark interest rate to 0.75 %, thus initiating the withdrawal of the monetary stimulus initiated almost a year and a half ago due to the pandemic, given an improvement in the economic outlook.

The Board unanimously adjusted upwards the monetary policy rate (TPM), which fell to a historic low of 0.5% in March of last year, shortly after the coronavirus broke out in Chile.

“The activity gap will continue to close rapidly, hand in hand with a high fiscal impulse and a strong dynamism of consumption. This creates the conditions for a reduction in the monetary impulse,” the bank announced.

This is also the first hike in the bank’s monetary policy rate in the 30 months since January 2019. Even in a context of gradual normalization, it noted, “monetary policy will continue to accompany the recovery of the economy.”

“This is how, starting from one of the most expansionary levels among comparable economies, the Council anticipates that the TPM will be below its neutral value throughout the two-year policy horizon,” he added.

With 1.59 million infected and 34,049 deaths since the start of the pandemic, Chile is leaving behind a second wave that led authorities to confine much of the territory between April and June.

The Chilean economy contracted by 5.8% in 2020 – the worst fall in four decades – and almost 2 million jobs were lost due to the pandemic, but the Central Bank estimates a GDP growth for this year of between 8.5% and 9.5%.

The Bank’s forecasts are very optimistic – they are above those of the World Bank (6.1%), the International Monetary Fund (6.2%), the Economic Commission for Latin America and the Caribbean (8%), and even that of the Chilean government itself (7.5%).