Given the latest spike of inflation in Chile which jumped 1,2% in September, the central bank council surprised markets by increasing the basic monetary lending rate 125 points, that is from 1,5% to 2,75%, the highest since 2001. The five-member Council decision was unanimous.
The evolution of the macroeconomic scenario has increased risks for inflation convergence to 3% in the near political horizon. Although subjacent inflation has evolved as expected, prospects for the coming months on a two-year term have increased to above the 3% target
Based on this analysis the Council has decided to advance the withdrawal of the monetary stimuli, anticipating that Monetary Policy Rate will reach a neutral point before than expected according to the September evaluation, ensuring that the inflation target of 3% is achieved in a two-year process.
Likewise, the Chilean central bank has agreed to suspend the accumulation of international reserves, which started last January, given the evolution reached and financial markets performance. In effect, the Economic Expectations, and Financial Operators surveys have increased with estimates of inflation above 3% and sustained.
As to international prospects, the Chilean Central bank said global activity has moderated because of new outbreaks of Covid 19 in a context of increasing world inflation, particularly the cost of oil. Given this situation, several central banks such as the Federal Reserve, Bank of England have anticipated changes while Norway, New Zealand and other emerging economies have increased basic rates.
Finally in Chile, the deterioration of financial markets has been stronger and systematic, than in the extremes of international situations. This is mainly because of idiosyncratic attitude changes and the uncertainty about political-legislative affairs, particularly the decision to allow new withdrawals from pension funds.