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Chile’s central bank is set to deliver its first interest rate increase in over two years on Wednesday, as emergency spending and a speedy vaccination campaign underpin a recovery that’s fueling above-target inflation.
The bank will lift its overnight rate by a quarter point to 0.75%, according to nearly all economists in a Bloomberg survey. Only one of them forecasts policy makers to stay on hold. The monetary authority had already considered a hike last month, but decided to wait to ensure its plan was well-communicated to investors.
Chile is likely to be the third Latin American country to tighten monetary policy this year, following Brazil’s aggressive hikes and Mexico’s surprise decision last month. Central banks across the region are turning more hawkish to respond to resurgent inflation as growth bounces back. The Chilean government has doled out billions of dollars in direct aid, job subsidies and health-care spending. Coronavirus cases are also tumbling due to one of the world’s fastest inoculation drives, whetting bets of a strong, second-half economic rebound.
What Bloomberg Economics Says
We expect Chile’s central bank to increase its benchmark rate by 25 basis points to 0.75% at Wednesday’s meeting. Forward guidance should indicate it is the start of a tightening cycle. Central bank forecasts anticipate a sharp rise in domestic demand, with the output gap turning positive in the second half. Policy makers can reduce monetary accommodation to avoid demand-driven pressure on prices and worrisome macroeconomic imbalances.
--Felipe Hernandez, Latin America Economist
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Wednesday’s decision will be published on the central bank’s website at 6 p.m. local time in Santiago together with a statement from the bank’s board. Here’s what investors will be focusing on:
Hiking Pace
Investors will search for clues to how fast rates will rise and how high they will go. In the minutes to the June meeting, the bank board wrote monetary policy will remain expansionary for a prolonged period. Financial markets may read any change to that outlook as a sign of steeper hikes. “We would not discard changes to that guidance given the growth-inflation outlook, changing global monetary policy backdrop” and fiscal dynamics, Alberto Ramos, chief Latin America economist at Goldman Sachs Group Inc., wrote in a note.
Inflation Surprise
Investors will look to see how the central bank describes inflation trends after June consumer prices surprised by rising much less than expected. Policy makers are forecasting annual inflation at 4.4% in December -- well above the 3% target -- and bank President Mario Marcel said in an interview last month that oil and transportation were pressuring cost of living. Prices have also been driven by economic activity that’s back at pre-pandemic levels.
Growth Challenges
Financial markets will be keen to see how the central bank acknowledges potential headwinds to Chile’s recovery. The government has come under pressure to revive a weak labor market that lost thousands of jobs in the three months through May. Additionally, upcoming elections and the rewrite of the constitution means political uncertainty ahead. If the central bank strikes a more cautious tone, it may hint at a slower and less aggressive hiking cycle.
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— With assistance by Rafael Gayol, and Rafael Mendes