NEW YORK — With a polarized presidential election only days away in Chile, investors in the South American will focus on a more certain decision taking place today: another interest rate increase.
U.S.-based investment banks, such as Goldman Sachs, are convinced that the nation’s central bank will raise its benchmark rate to tame a 13-year high inflation and a buoyant economic activity that is making the 5.8% contraction endured last year a thing of a “distant” past.
“Given the recent macroeconomic and financial developments and the evolution of the balance of risks for inflation, growth, CLP, and overall financial stability we believe the central bank will deliver another decisive 125bp hike and bring the policy rate to a high-neutral 4.0%,” analysts Alberto Ramos, Sergio Armella and Daniel Moreno wrote in a report to clients dated December 10.
After keeping its reference rate for more than a year at technical minimum level of 0.5%, Banco Central de Chile started to raise rates in July, hiking at that time 25bps. And in its most recent decision on October 13, the monetary authority increased rate in 125bps to 2.75% as the Andean country’s economy rebounds strongly from the coronavirus pandemic, Reuters reported. The bank announces its monetary decision at 5pm EDT.
In November, Chile’s annual inflation rose to a “high and significantly above” target 6.70%, the highest level since December 2008, as prices accelerated broadly in housing and utilities, recreation and culture, education, furniture, and restaurants and hotels, Trading Economics reported. The consumer price index held at 6.0% in October and 5.70% in September.
On Sunday, the country holds a second-round to elect its next president between José Antonio Kast (Frente Social Cristiano) and Gabriel Boric (Apruebo Dignidad). Polls suggest leftist lawmaker and former student activist Boric, has a slender lead over Kast, although a volatile social environment means the race is likely to go down to the wire, CNBC reported on website December 10. The two candidates participated in a televised debate yesterday. The new government takes office March 2022.
Additional Rate Hikes
Beyond the outcome of the presidential race, Goldman Sachs sees Chile’s economic activity continuing its momentum leading to additional rate increases into 2022.
“We believe the recent significant inflation surprises, deteriorating short- and medium-term inflation expectations, continued peso depreciation, the uncertain political and policy environment, and the deteriorating fiscal dynamics call for a conservative calibration of monetary policy,” the analysts said in the report.
“We are of the view that, after ending the year at 4.0%, the policy rate will ultimately rise further up above neutral and end 2022 at 5.75%,” they added in the research note.
Chile’s economy is rebounding after contracting 5.8% in 2020 and the International Monetary Fund is projecting the gross domestic product will expand 11% this year.
Also relevant:
* IMF, Chile Conclude Financial System Stability Assessment
* Chile’s Uncertain Next Chapter: Foreign Affairs
* Chile’s Kast Leads Election, Set For Run-Off With Boric December 19: Reuters
* Chile’s Senate Rejects Impeachment Motion Against President Piñera: La Tercera
* IMF Sees Latin America GDP Growing 6.3% This Year; Says Recovery Still Far From Complete
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