Chile to Slow Rate Hikes as Economic Boom Cools: Decision Guide

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Chile's central bank is expected to slow the pace of its interest rate increases as policy makers counterbalance mounting signs of an economic slowdown with annual inflation that's poised to surge into double digits.

Eleven of 16 analysts surveyed by Bloomberg expect the overnight rate to rise by a full percentage point to 8% on Thursday. One economist forecasts a third straight hike of 1.5 percentage points, while two see an increase of 75 basis points and two a boost of 50 basis points.

Policy makers led by Rosanna Costa are calibrating their monetary policy tightening as annual inflation rockets toward 10% despite more subdued consumer demand. Companies are postponing investments on political uncertainty, and lawmakers recently rejected bills for more pension drawdowns, which have driven consumption. Investors still see consumer prices above target in two years as food and fuel costs jump.

The expected slowdown in the magnitude of Chile's rate increases comes as the U.S. Federal Reserve on Wednesday delivered the biggest rise in borrowing costs since 2000 and signaled it would keep hiking at that pace over the next couple of meetings.

Brazil's central bank, in the meantime, raised its benchmark rate on Wednesday by a full percentage point and signaled another likely hike of smaller size next month, stopping short of calling an end to one of the world's most aggressive tightening cycles.

Thursday's decision in Chile will be published on the bank's website at 6 p.m. in Santiago together with a statement from its board, which now has all five voting members with the inclusion of Stephany Griffifth-Jones. 

Here are the key points that Chile-watchers will be looking for in this decision:

Rate Guidance

Investors will seek insight into how much more borrowing costs will rise. While some analysts see rates finally peaking at 8.5%, others say increases to 9% or even more remain on the table in light of worse-than-expected inflation data.

What Bloomberg Economics Says

“We expect the central bank to increase the benchmark rate by 100 basis points to 8% on May 5. This would be less than hikes of 150 basis points in each of the previous two meetings, but more than the final hike of 50 basis points that the central bank penciled in its quarterly outlook in March. Higher-than-anticipated inflation through March, evidence of falling activity in 1Q and already tight monetary conditions help explain. Policy makers are likely to keep the door open for more hikes.”

-- Felipe Hernandez, Latin America economist

-- Click here for the full report

At the prior rate-setting decision in March, the bank board signaled it intended to deliver smaller rate increases going forward, comments that many economists interpreted as the beginning of the end to tightening. Policy makers may take a more cautious approach in their guidance this time around.

“Recent economic activity and inflation data has been particularly volatile, and therefore it is not convenient to jump into conclusions that either price pressures will strongly decline in the upcoming quarters or will continue climbing,” Credicorp Capital economists Samuel Carrasco and Daniel Velandia wrote in a note. “The fine tuning of the monetary policy decisions will be highly data-dependent.”

Inflation Persistence

Financial markets will scour the statement for clues on how long policy makers see costlier commodities from wheat to oil pressuring inflation.

Consumer price gains are expected to have reached 10.1% in April, according to economists surveyed by Bloomberg ahead of the data release Friday.

President Costa has said the bank is working to gauge the persistence of a raw material price shocks stemming from Russia's invasion of Ukraine. At the same time, the government has taken steps to blunt increases in fuels and electricity. 

Still, traders see annual inflation at 6.90% in 12 months and 4.30% in two years, according to a central bank survey published May 2. Both figures are well above the 3% target.

“The deteriorating inflation expectations, the somewhat uncertain policy environment due to the ongoing drafting of a new constitution, and a more hawkish Fed all support the case for the MPC to drive the policy rate toward a more restrictive stance,” according to Goldman Sachs Group Inc. economist Sergio Armella.

Global Risks

The bank board will likely comment on global threats to inflation. Rising Covid-19 cases and lockdowns in China may exacerbate supply bottlenecks, and rate hikes by the U.S. Federal Reserve may further tighten monetary conditions.

©2022 Bloomberg L.P.