Big Interest Rate Hike at the Central Bank of Chile

January 26, 2022

Whereas G7 central banks other than the Bank of England (whose interest rate is still a very depressed 0.25%) have not begun interest rate lift-off, the same is not true at many second-tier monetary authorities. For example, the Brazilian Selic rate has been raised from a 2.0% pandemic low to 9.5%. Ukraine’s policy rate has climbed to 10% from 6% ten months ago. The Polish and Hungarian central bank policy rates had been as low as 0.1% and 0.6% but now are at 2.25% and 2.9%, respectively, and Iceland’s policy rate has increased to 2.0% from 0.75%.

The Central Bank of Chile also has followed this more proactive approach to rising global inflationary pressure. Prior to a 25-basis point initial increase in mid-July 2021, that bank’s policy interest rate had been just 0.50%. A 75-bp hike followed in August, and then Chilean monetary officials took rate normalization to an higher gear with increases of 125 basis points each in October and December. Today’s announcement informed us of a 150-basis point rise from 4.0% to 5.5%. Defending today large advance, officials opined

The evolution of inflation continues to face significant risks and their possible materialization becomes especially relevant in a context where both the annual change in the CPI and its outlook are already high. In particular, the recent evolution of activity and inflation is somewhat above the forecast in the December MP Report, and inflationary pressures from the international scenario have increased. The Board’s decision is consistent with a monetary policy path that, in the short term would stand near the upper edge of the MPR corridor described in the last Report.

Year-on-year CPI inflation of 7.2% in Chile was only marginally higher than the U.S. 7.0% rate last month, and the overshoot versus Chile’s target of 3% was less than the U.S. overshoot of the Fed’s 2% target. Also, the acceleration last year had been less steep in Chile than in the United States: back in February 2021, CPI inflation had been at 2.8% in Chile compared to 1.7% in the United States.

Inflation crises in the past may account for the more melodramatic response to inflation of the Central Bank of Chile than, say, that of the Federal Reserve. The United States experienced elevated inflation in the 1970s but nothing comparable to the hyperinflation of Chile. U.S. CPI inflation from end-1971 to end-1978 averaged 7.1%. CPI inflation in Chile climbed from 78% in 1972 to 353% in 1973 and 505% in 1974 before settling back to 375% in 1975, 212% in 1976, 92% in 1977 and 40% in 1978. With a history like that, Chilean monetary authorities can not allow themselves to take a patient approach to addressing above-target inflation.

Copyright 2022, Larry Greenberg. All rights reserved. No secondary distribution without express permission.

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