Chile Poised to Lift Key Rate to Seven-Year High: Decision Guide

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Chile’s central bank will likely raise its key interest rate by 125 basis points for the second straight meeting as robust consumer demand fuels price increases and drives inflation forecasts further above target.  

The bank will lift borrowing costs on Tuesday to 4%, their highest level since 2014, according to 13 out of 16 economists in a Bloomberg survey. Two of them expect a rate increase of 100 basis points while one sees a 150-point hike. 

Chile’s rate decision is one of the first in a week packed with monetary policy meetings around the globe. It also comes just five days before a highly contested presidential runoff between leftist Gabriel Boric, who wants higher taxes to improve public services, and conservative Jose Antonio Kast, who seeks to lower levies and boost the role of the private sector in the country.

Chile’s central bank, led by its President Mario Marcel, has increased rates by 225 basis points since July in a bid to battle inflation that’s running at its fastest annual pace in 13 years. But the economy still risks overheating as Chileans are flush with cash from billions of dollars in pandemic stimulus. A firming labor market is also spurring consumer demand, fueling increases in prices of services and goods, while global issues such as costlier fuels aggravate the outlook.

What Bloomberg Economics Says

“High inflation, lingering price pressures and rising inflation expectations advocate for hikes. Increasing activity and strong domestic demand also support tighter monetary conditions. Policy makers may anticipate more tightening next year.”

-- Felipe Hernandez, Latin America economist

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Policy makers’ decision will be published on the bank’s website at 6 p.m. local time in Santiago, together with a statement from board members. Here’s what investors will be looking out for:

How Temporary?

Investors will seek clues on how much longer policy makers expect price pressures to last. Chile’s inflation has topped forecasts for five months in a row, hurting the central bank’s credibility even after it delivered in October the biggest rate hike in two decades.

Traders and economists surveyed by the monetary authority see consumer prices rising above the 3% target for the next two years, at least.

“This is a very unusual phenomenon,” Credicorp Capital economists Samuel Carrasco and Daniel Velandia wrote in a report, referring to the widening gap between inflation forecasts and the target. The central bank “closely monitors expectations in the monetary policy horizon, expecting them to be well-anchored at 3%.” 

Above Neutral

Given the string of inflation surprises, investors expect the central bank to present guidance on how much above the neutral level, which neither stimulates nor restricts the economy, borrowing costs will rise next year.

Markets are also debating how soon policy makers will slow the pace of rate increases. Some economists argue that any deceleration now runs the risk of forcing steeper hikes in the future. Until now, policy makers have only signaled plans to take borrowing costs to neutral -- which they consider to be around 3.75% -- in Tuesday’s decision.

Economic Recovery

Analysts will scour the bank statement for comments on the recovery of one of Latin America’s richest economies and how much of an impulse it will retain going into the new year.

Since the last policy meeting, congress rejected a proposal for another round of early pension fund withdrawals that, according to finance ministry estimates, could have injected some $20 billion into the economy. Furthermore, the government closed the door to a new round of emergency cash transfers. 

Still, there’s no shortage of signs that activity remains too hot. Retail sales are 31.5% above pre-pandemic levels, according to Goldman Sachs Group Inc., and the unemployment rate has fallen for seven consecutive months.

©2021 Bloomberg L.P.