The Central Bank of Chile increased its reference interest rate again this Wednesday, which went from 4% to 5.5%, to contain the escalation of inflation, which in 2021 marked 7.2%, the highest in 14 years. In its monetary policy meeting, the Board of the Central Bank of Chile agreed to increase the monetary policy interest rate by 150 base points, up to 5.5%. “The decision was adopted unanimously by the directors present,” the entity said in a press release.
The measure, which surprised the market – where a smaller increase of 125 base points was expected – is the largest increase that the Central Bank has carried out since July last year when it began its policy of increasing the rate after 30 months of keeping it stable at 0.50%.
(See: The rise in interest rates, ‘recipe’ to combat inflation).
The last rise is also “the highest since 2001, which applies the nominal rate”, a BC source confirmed to AFP. In this way, in the face of an escalation in inflation, mainly due to an excess of internal liquidity that has put pressure on domestic prices, the reference rate in Chile went from July 2021 to January 2022 from 0.50% to 5 ,5%.
HIGH LIQUIDITY, HIGH INFLATION
During 2021, inflation in Chile reached 7.2%, the highest in 14 years, more than double the tolerance range of 3% per year established by the Central Bank itself. “The rise in prices was generalized among the different items in the basket,” the issuer explained in the statement.
Prices in Chile have increased mainly due to excess liquidity after the large social aid provided by the government of the conservative Sebastián Piñera until December to deal with the effects of the pandemic, which meant a disbursement of 3,000 million dollars per month.
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Additionally, the three early withdrawals from private pension funds approved in Congress in the midst of great social pressure. The three withdrawals meant an injection into the Chilean economy of nearly 50,000 million dollars. Everything, in a context of global increase in the price of raw materials, especially oil, which has a strong impact on the economy of Chile, a net importer of this fuel.
“The risks for the evolution of inflation continue to be significant and its eventual realization becomes especially relevant in a context in which both the annual variation of the CPI and its prospects are already highs”, warned the BC, adding that “inflationary pressures derived from the international scenario have increased”.
DECELERATION
For 2021, the Gross Domestic Product (GDP) Chile would close with a 12% increase, in a rapid recovery after the 5.8% drop with which the country closed 2020, hit by the pandemic.
(See: The Fed would raise interest rates starting in March).
Last year, as a result of the successful vaccination campaign, which allows Chile to have more than 88% of its population with its complete vaccination schedule and 72% with a booster dose, a large part of the productive activities were able to stay active. For this year, however, a significant economic slowdown is expected, with GDP growth of around 2%, hand in hand with the withdrawal of state aid.
On March 11, the young leftist Gabriel Boric assumes the government to replace the conservative Piñera, who appointed former Central Bank president Mario Marcel as Minister of Finance. The economist has said that the control of inflation will be his priority along with implementing the tax reform with which the Boric government intends to finance the social transformations that it promised to make gradually.
(See: At the end of 2021, banks boosted interest rate charges).
AFP
