Chile raises rate 5th time, significant risks to inflation

“At its Monetary Policy Meeting, the Board of the Central Bank of Chile agreed to increase the monetary policy interest rate by 150 base points, up to 5.5%. The decision was adopted unanimously by the Directors present.

The evolution of the Chilean financial market has been marked by both external and internal factors, although with a predominance of the latter, possibly associated with a decrease in internal uncertainty. Since the previous meeting, the peso appreciated about 5%, the stock market rose around 5%, long-term interest rates, although with ups and downs, are at similar levels and the country risk (CDS) fell back close to 10 basis points (bp). On the other hand, short-term interest rates rose in response to higher effective inflation and higher monetary policy rate expectations. In any case, the levels of uncertainty continue to be high in historical comparison and long-term interest rates maintain a relevant differential with respect to their external peers.

In the aggregate, the activity and demand indicators are consistent with the upper part of the projection range for 2021 considered in the December Report. In November, activity increased 14.3% annually —0.3% monthly for the seasonally adjusted series—, highlighting the contribution of service activities and, to a lesser extent, commerce. In demand, the sustained dynamism of imports of all types of goods stands out. Private expectations (EES) continue to predict GDP growth rates of around 2% for 2022 and 2023. The labor market continues to show a gradual recovery, with a supply that remains contained by households and high levels of demand for company work. Bank credit, in general, maintains a limited dynamism, prevailing demand factors.

The annual variation of the IPC reached 7.2% in December, exceeding market expectations and the projection of the last Report. The rise in prices was generalized among the different items in the basket. Once again, the increase in core inflation —CPI without volatiles— stands out, standing at 5.2% annually, driven by both the prices of goods —which surprised on the rise— and services. In the volatile component, the contribution of fuels and the evolution of some specific items continued to stand out. Private inflation expectations remain above 3% two years ahead.

The risks for the evolution of inflation continue to be significant and its eventual materialization becomes especially relevant in a context in which both the annual variation of the CPI and its prospects are already high. In particular, the recent evolution of activity and inflation is somewhat above what was forecast in the December Report and the inflationary pressures derived from the international scenario have increased. The Board’s decision is consistent with a monetary policy trajectory that, in the short term, would be around the upper edge of the rate corridor considered in the last Report. A new evaluation of this will be carried out in the next Report.

The minutes corresponding to this Monetary Policy Meeting will be published at 8:30 a.m. on Thursday, February 10, 2022. The next Monetary Policy Meeting will be held on Tuesday, March 29, 2022 and the respective statement will be published as of 6 p.m. that day.”

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