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Chile’s central bank raised its overnight interest rate by 1.5 percentage points to 5.5 percent, surprising analysts’ expectations of no more than a 1.25-percent bump.
In its December meeting, the bank had indicated that rate increases would be no more than 1.25 percentage points at a time.
It was the bank’s biggest rate hike since 2001, a forceful attempt to tackle inflation, which climbed to 7.2 percent in December, its fastest clip in 14 years.
“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 [consumer price index] and its outlook are already high,” the bank’s governing board wrote in a statement announcing the increase.
Chile’s economy grew by 12 percent last year, according to the bank’s estimates, the fastest rate of any South American nation.
Almost two-thirds of the population has been vaccinated against COVID, which persuaded officials to lift most economic and social restraints.
The expansion also was fueled, in part, by the government’s cash payments and by its decision to permit three rounds of penalty-free early pension withdrawals, which put an additional $50 billion into the economy.
“We expect a rate hike of [1.5 percentage points] in March and then to have borrowing costs held at that level for one or two meetings as [bank officials] wait for signs that the economy and inflation are cooling off,” Sergio Godoy, STF’s chief economist, told Bloomberg.
The bank’s rate-setting committee has signaled that rates will reach 6.5 percent during the next quarter and 6.75 percent in the third.
Individual rate boosts are likely to be small “unless there’s another inflation surprise,” Euroamerica economist Martina Ogaz said to Bloomberg.
TREND FORECAST: The high interest rates will slow Chile’s economic growth. In fact, even though cooper is a primary Chilean export and its prices jumped 25 percent in 2021, its peso fell nearly 17 percent. Thus, they have to keep rates high from keeping the peso from slipping.
And as we reported, Carlos Jaramillo, head of the World Bank’s operations in Latin America and the Caribbean, told the Financial Times, that among the economies of Latin America where the COVID War has done the most damage, it will take at least until 2023 to return to pre-pandemic levels: “It will only be a gradual recovery,” he said. “I don’t think we’re expecting a [quick bounce-back anywhere.]”
Also see, “LATIN AMERICA FACES SLOW, PAINFUL ECONOMIC RECOVERY” and “U.N. WARNS LATIN AMERICAN ECONOMIC DISASTER LOOMING.”)