The Chilean Central Bank's Monetary Policy meeting on Tuesday raised the reference interest rate 125 base points to 4%, the highest since June 2014. The decision came as no surprise for markets since the bank is determined to contain inflation, (6,7% in the twelve months to November) and anticipated it will continue on the path for as long as necessary.
The Monetary Policy rate will continue the trend ”above its nominal neutral level (coherent with 3% inflation) for the coming horizon of monetary policy (24 months) said the central bank's release.
It's a very strong message, the Central Bank acknowledges there is a deviation of inflationary expectations and thus an aggressive response is needed, taking the reference rate to 4%, according to Rodrigo Montero, Dean of the Business School at the Autonomous University in Santiago. He added, The bank is admitting that there are supply factors influencing the price level, as in the rest of the world, but there are also domestic elements causing misbalances and an increase in inflation, and the bank is intent in returning to the original 3% target.
Scotiabank underlines that any short term inflationary surprise can cause lack of credibility in monetary policy, difficult to recover, but seems confident the central bank is on the right track, with annual inflation close to 8% in the first half of 2022 and then sliding gradually to below 5%, and thus expects the next Monetary Policy meeting in January could decide on a further increase of the reference rate to 5%.
Santander points out that the central bank policy is now contractive for the economy, which has been overheated for some time. Anyhow the Spanish bank expects the monetary policy to contribute to moderate activity and foresees no sudden or intense adjustment. We believe the Monetary Policy rate will continue increasing in coming meetings but should begin to moderate towards the end of next year”.
Higher interest rates will have an impact on consumer spending and mortgages, and most probably investment projects will become dearer. But with the looming runoff next Sunday with a polarized electorate, markets in Chile are nervous, the stock exchange has been bearish for weeks, and the local currency has fallen almost 18% in six months, and now stands close to a record 850 Chilean pesos to the US dollar.