SANTIAGO, Oct 14 (Reuters) – The biggest rise in Chile’s benchmark interest rate in two decades sets the stage for a faster tightening of monetary policy going forward, as the central bank seeks to combat runaway inflation.
The governing body raised its Monetary Policy Rate (MPR) by 125 basis points on Wednesday, more than expected, in a bid to absorb excess liquidity as the economy heats up, fueling the advance in prices in the major world producer of copper.
The move heralds further hikes in the near future.
“The surprisingly large rate hike of 125 bp delivered yesterday by the Central Bank of Chile, to 2.75%, suggests that it will continue to advance its tightening cycle,” said Nikhil Sanghani of Capital Economics in a note.
The consultancy now expects an additional 225 basis points to rise in this cycle, to 5% in the first quarter of 2022, above its previous forecast of 4% in the same period.
In its statement, the Bank stated that it decided to advance the withdrawal of the monetary stimulus, “anticipating that the MPR will reach its neutral level earlier than expected in the central scenario of the September Report.”
In September, the institute forecast that the MPR would reach levels around its neutral value by the middle of the first half of 2022.
In the midst of rising global prices, Chile is experiencing inflation that exceeds the bank’s tolerance range. The annualized rate is 5.3%, openly exceeding the range between 2.0 and 4.0%. That will support more rate increases.
“Rates should continue to trend upward as the authorities are clearly concerned about inflation and will continue to be aggressive,” Citi Research said in a report, adding that it expected the MPR to peak at 6% in the first half. of the next year.
He also added that the uncertainty about new pension fund withdrawals, which have injected liquidity into the market and helped drive economic growth, would also affect rates.
Lawmakers are expected to approve a fourth withdrawal, which the central bank has warned could further fuel inflation.
Chile’s economy has shown a stronger and faster recovery than expected after the impact suffered by the coronavirus pandemic, also helped by a rapid vaccination campaign.
In a report to clients, Santander Chile called the hike “aggressive” and added that if more pension funds were released, “there could be further aggressive rate hikes, bringing it above its neutral level as early as early next year.”
Goldman Sachs said the forward-looking guidance indicated further increases, although it said the move would help keep the bank “staying at the forefront of deteriorating current and expected inflation dynamics.”
“We believe that acting decisively from the beginning reduces the risk of having to apply an interest rate shock later to anchor inflation back to the target,” the bank said.
(Report by Rodrigo Campos and Fabián Cambero. Edited by Rodrigo Charme)