Chile’s central bank surprised most analysts by increasing its interest rate by 125bps to 2.75% on its October 13 meeting. Bank of America says the monetary authority is far from done as the bank tries to fight a still rising inflation.

Analysts Sebastian Rondeau and Christian Gonzalez Rojas see the central bank hiking at least 75bps on the next meeting scheduled for December 14. “We expect another hike of 75bp in December to 3.5% assuming the 4th pension bill withdrawal does not pass Congress, our base case,” the analysts wrote in a research note.

BofA’s base case scenario is consistent with the central bank statement that the neutral policy rate, at 3.5% +/-0.25%, would be reached earlier than it anticipated by the first half of next year. “If instead the pension withdrawal bill is approved, we think there could be another hike of 100bp-125bp in December,” analysts wrote in the report dated October 13.

The central bank justified its hiking decision on the fact that “inflation expectations have risen in all horizons.” Last month the consumer price index rose to an annual rate of 5.3%, the highest level since November 2014 and compared to 4.8% in August.

Chile’s price formation may be under additional pressure as the nation’s lawmakers are debating new pension withdrawals that could pump as much as USD20 billion into the economy,centralbanknews.com reported on its website.

“BCCh emphasized the financial shock originated mostly from political and legislative uncertainty and in particular the 4th pension fund withdrawal discussion. Hence, we believe the large hiking reaction sends a message BCCh will counteract potential further
pension withdrawals (and/or fiscal stimulus),” the analysts said.

Inflation Outlook

Chile’s central bank also decided to suspend its FX purchase program of ~USD 800 million per month due to the financial situation, a decision that along with the interest rate increase “should support the CLP in the short run,” according to Bank of America.

The analysts now expect that Chile’s policy rate will converge to 4.75% by mid-2022, compared with a previous expectation of 4.5%, above the center of the IPOM’s rate corridor of 4%. “We think the large liquidity in households’ current accounts is also a factor of concern that can continue boosting demand going forward.”

BofA see Chile’s inflation reaching 5.6% this year and 3.6% in 2022. The South American nation holds the first round of its presidential election November 21, with the runoff on December 19.

Chile’s economy has bounced back swiftly from the COVID-19 pandemic and in the second quarter its gross domestic product grew 18.1% y/y, centralbanknews.com reported. Just last month the central bank raised its forecast for growth this year to 10.5% to 11.5% from its earlier estimate of 8.5% to 9.5%.