Chile's Monetary Policy Group, GPM, recommended on Tuesday that the Central Bank raises 100 points the Monetary Policy Rate, taking it from the current 1,5% to 2,5%, because of an upsurge of inflation and to safeguard the macroeconomic stability of the country.
GPM points out that at international level, global economic prospects continue favorable but warned of several risks in the horizon. In effect the IMF anticipated it would review its forecasts, China, one of the pillars of global growth is showing some symptoms of a financial misbalance, mainly because of the giant real estate group Evergrande inability to honor maturing loans, apparently extensive to the whole real estate industry, plus serious limitations as to the provision of energy.
A second issue for the global economy is that inflation has quickened in several countries given a world dynamic demand, problems with supply for several goods and an overall increase in the price of commodities.
As to the Chilean economy, it continues to show dynamism and with an overheated economy in 2021, a growth advance of more than 18%, the 2022 scenario is far more modest, 2 to 3% but also with uncertainty since the pandemic is not over plus the global risks mentioned before. Similarly with the promised fiscal consolidation and the multiple political and institutional challenges which are latent.
Besides inflation concerns are no longer incipient as believed a few months ago but on the contrary quite concerning. September surprised with an inflation increase of 1,2%, the highest since 2008 and well above expectations. Price increases have their origin in external and domestic factors. There is an external inflation and greater international inputs costs because of bottlenecks in the supply chain
But also domestic issues such as a greater liquidity and demand from a highly expansive fiscal policy with congress allowing to withdraw pension funds to face the sanitary emergency. Likewise during September the Chilean Peso depreciated and intensified in recent weeks reaching 820 Pesos to the US dollar, allegedly mainly because of the political uncertainty, which is hoped does not turn into a long term process with its impact on inflation.
Coherent with the previously described scenario and with the strong purpose of safeguarding macroeconomic stability the GPM strongly recommends to accelerate the normalization of the TPM taking it to 2,5% The Chilean GPM was created in 2002 and is made up of five distinguished professionals on a rotation basis, who are experts in macroeconomics and of different tendencies.
The GPM is an idea born out of Germany's Council of Economic Experts, (or Germany's five wise men) an academic body that has been advising German policymakers on economic issues since 1963. Its reports on macroeconomic developments play a major role in government decision-making.