(Bloomberg) -- Chile's central bank said it opted for an interest rate hike of 1.5 percentage points at its last meeting -- less than many had expected -- because it left them in a better position to speed up increases if necessary in future.
Bank board members considered a borrowing cost hike of 125-, 150- or 175-basis points at the March 29 meeting, according to the minutes published on Wednesday. Policy makers agreed that rates should be raised at a “significant pace” given high annual inflation.
“The 150bp option was the one that best fit in both technical and communicational terms with the intended message to be conveyed,” policy makers wrote. “Such a decision left them in a more comfortable position to react to any deviation or to accelerate the adjustment if deemed prudent as new information would become available.”
The statement issued on the day of the rate decision had indicated future rate hikes “would be smaller than those of recent quarters,” while adding that policy depended “on the evolution of the macroeconomic scenario.”
Policy makers have raised borrowing costs by 650 basis points since July to combat above-target inflation driven first by an overheated economy and more recently, spiking raw material costs. Consumer prices topped all estimates last month, rising the most in nearly 30 years in the month. That reading sparked investor bets of an even longer tightening cycle despite slowing activity.
Read more: Latin America Inflation Shocks Raise Prospect of More Rate Hikes
Chile's economy, which relies almost entirely on imported fuels, has been stung by oil prices hovering above $100 a barrel following Russia's invasion of Ukraine. Staple goods in the local diet, such as bread and chicken, have also become more expensive amid a global rise in food costs.
March's consumer price spike was a significant surprise that will be closely analyzed by policy makers, central bank President Rosanna Costa said during an online event later on Wednesday. She reiterated that the bank's forecasts do include a scenario with more persistent inflation.
Congressional legislation for a further round of early pension fund withdrawals represents another possible inflationary threat on the horizon. On Tuesday, the government presented a rival bill for more focused drawdowns that are designed to limit the pressure on consumer demand and prices.
Cost of living increases remain significant even as economic growth slows from last year's record jump of 11.7%. The central bank sees gross domestic product expanding just 1%-2% in 2022 and possibly shrinking in 2023.
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