MercoPress. South Atlantic News Agency

Chile raises reference rate to 5,5% to combat inflation: More could come

In the twelve months of 2021 Chilean inflation reached 7,2% highest in 14 years and more than double the annual target, 3% established by the Central bank.

The Chilean central bank hiked its reference rate from 4% to 5,5% to contain inflation which last year reached 7,2%, the highest in fourteen years. The Monetary Policy council of the bank on Wednesday agreed unanimously to increase the reference rate by 150 base points, according to the official release.

The decision surprised markets since a 125 base points increase was anticipated and the 150 base points is the highest since last July when the bank started to raise the reference rate after holding it for thirty months at 0,50%.

Given the escalation of inflation, triggered by an excess of liquidity in the domestic market that has put pressure on prices, the reference rate in Chile has soared from 0,50% last July to 5,5% this month.

In the twelve months of 2021 Chilean inflation reached 7,2% the highest in fourteen years and more than double the annual target, 3% established by the Central bank.

Prices in Chile have increased mainly because of an excess of liquidity following on the massive social support delivered by government to contain the effects of the pandemic, estimated in some three billion dollars.

To this must be added the three withdrawals from the private pensions scheme, which were approved by congress in the midst of a great social unrest situation. The withdrawals from the private pensions has been estimated at 50 billion dollars in the context of increasing prices for commodities including oil, of which Chile is a net importer.

“Risks for the evolution of inflation remain significant and in the event of materializing they are particularly relevant in a context in which the annual CPI and its prospects are already elevated” warned the central bank, pointing out that “inflationary pressures from the international scenario have increased”

During 2021 Chile's GDP increased a record 12%, following a 5,8% drop in 2020 because of the pandemic.

The current chair of the Chilean central bank is Mario Marcel who will be joining the new government as Finance minister on 11 March. Marcel anticipated that his main objective will be controlling inflation as well as setting the foundations for a tax reform, one of the promises of the incoming president elect Gabriel Boric