The Monetary Council of the Chilean central bank surprised markets on Monday by deciding to increase the basic interest rate 75 base points to 1,5%, the highest jump since August 2001. According to a bank release, the decision from the council was unanimous, and well beyond market expectations that had estimated an increase of 25 to 50 base points.
The Council has responded to the need to avoid the accumulation of macroeconomic misbalances, which among other consequences could lead to a more persistent intensification of inflation, and diverting it from the two-year target of 3%, said the release from the bank chaired by Mario Marcel.
”The Council decided to intensify the withdrawal of monetary stimuli increasing the Monetary Policy Rate (TPM) 75 base points. Details of the central scenario and risks as well as the implications for future TPMs will be published on Tuesday added the release pointing out that there is a major increase in overall activity and consumers' purchasing expansion has put pressure on the level of prices.
In Chile, the performance of financial markets continues to be absorbed by idiosyncratic factors among which the possibility of another massive withdrawal of pension funds. This has led to an increase in interest rates for deposits, particularly referred to short term deposits, and this has also extended to interest rates on ten-year bonds.
This has had an impact on rising inflation with prospects of further spikes in the short term, plus the unfavourable performance of other variables relevant for inflation such as the exchange rate depreciation and a sustained rise in fuel prices.
The Chilean central bank started a return to normalization of monetary stimuli in the July meeting when the basic rate was lifted from 0,5%, a technical minimum since March 2020, when the pandemic officially took off, to them until this week 0,75% rate.