Home Chile BCCh BofA Says a Continued Inflation Will Push Chile’s Central Bank to Hike Rate to 6% in 1H

BofA Says a Continued Inflation Will Push Chile’s Central Bank to Hike Rate to 6% in 1H

BofA Says a Continued Inflation Will Push Chile’s Central Bank to Hike Rate to 6% in 1H

CARACAS– Chile’s central bank is likely to raise its reference interest rate by another 125bps this month to 5.25%, bringing it to 6% by May as the monetary authority extends efforts to control a rising inflation and the economy prolongs a post-Covid recovery, Bank of America said.

“Inflation remains very strong amid the consumption boom,” in the South America nation, analysts Sebastian Rondeau and  Christian Gonzalez Rojas wrote in a report to investors published January 11. The central bank is “under pressure as inflation and activity surprise on the upside, again,” they added.

Chile’s consumer prices index rose to 7.1% last year, exceeding Banco Central de Chile’ expectations of 6.9%, leading BofA to revise its 2022 CPI projection upward to 4.5% compared with the previous estimate of 4.2%.

On December 14, Chile’s central bank unanimously increased its benchmark rate to 4% from 2.75%, the second time in a row that exerted a 125bps increase, amid an accelerated withdrawal of monetary stimulus to temper inflationary pressures, Reuters reported.

With the cost of living still on the rise, Bank of America also revised is policy rate forecast. The bank now expects a 125bps increase at January 26 monetary meeting, vs an original estimate of 100bps, amid “persistently high inflation expectations” and stronger that expected economic data, the analysts said the five-page report. “This will take the policy rate to positive territory in real terms (vs 12 m-ahead expected inflation), for the first time in the cycle,” they said. “We now see the policy rate reaching a peak of 6% in May.”

Source: Bank of America report "Chile Economic Watch". January 11, 2022.
Source: Bank of America report “Chile Economic Watch”. January 11, 2022.

While Chile is expected to keep normalizing its monetary policy in tandem with Latin America’s biggest economies, the U.S. Federal Reserve will probably raise interest rates four times this year and start its balance sheet reduction process in July or earlier, according to Goldman Sachs Group Inc.

Surpassing GDP expectations

Bank of America estimates that Chile’s gross domestic product likely grew 12% last year, in line with the 11.8% expansion forecast by World Bank in its most recent economic projections. Chile then would be one of the three countries with the highest growth in Latin America in 2021, after Guyana (21.2%) and Peru (13.2%).

Inflation was also higher than expected. It closed at 7.2% last year, the highest rate since 2014. “The price increase is expected to remain strong in the first half of 2022, but will ease in the second half as ongoing fiscal stimuli ease”, BofA analyst said.

The bank sees inflation peaking at 7,5% in June, “it should then decline strongly in H2 amid weaker GDP following the fast withdrawal of fiscal and monetary stimulus, the increasing policy uncertainty amid the drafting of a new constitution, and political transition.”

BofA expects investors will focus now on the composition of the new economic cabinet as the administration led by President-elect Gabriel Boric is scheduled to formally take office March 11. Andrea Repetto, an economist and professor with a Ph.D. from the Massachusetts Institute of Technology (MIT); and former central bank president, Roberto Zahler, were recently mentioned as potential candidates to take the reins of the Ministry of Finance. But both seems out of the race, CNN Chile reported last week. Guillermo Larraín, a former securities regulator, Eduardo Engel, an ex-campaign adviser, Nicolás Grau and Claudia Sanhueza, both part of the economic team of the president-elect, are also among the candidates for the position, according to CNN Chile.

The International Monetary Fund sees Chile’s economy growing 2.5% this year.

Also Relevant:
* Chile Prosperity Hinges on ‘Forced Moderation’ of Boric’s Tax, Pension Reforms, BofA Says
With Chile Choosing a President in Weeks, BofA Sees a ‘Twilight Zone’ Post-Election Scenario of Rising Debt and Low Growth
Chile Central Bank Raises Benchmark Rate by 125bps to 4%, More Tightening Likely: Reuters
Chile’s Uncertain Next Chapter: Foreign Affairs
Morgan Stanley Sees a ‘Turnaround’ in Punished Chilean Assets as Most Consequential Election Looms Large
Brazil, Chile Markets ‘Overweight’ For Morgan Stanley as MXLA Seen Rising 14% Mid-2022


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