CHILE – Monetary Policy Meeting Minutes: Surprising the market, to better anchor inflation expectations

50-75bp rate hikes to persist for the time being

Andrés Pérez & Vittorio Peretti

15/09/2021


The minutes of the Central Bank’s August monetary policy meeting show that the Board considered raising the policy rate by either 50 or 75bps, while signaling that the current meeting frequency (8 per year) supports moves of a similar magnitude in the short-term to avoid the build-up of macroeconomic imbalances. The Board unanimously favored a 75bp hike to 1.5%. Up until the previous meeting (July), the Board believed the macroeconomic environment was consistent with a gradual and partial reduction of the monetary impulse (contemplating the options of staying on hold or a 25bp hike), maintaining the rate below neutral levels throughout the 2-year policy horizon. However, recent developments, including the extension and expansion of fiscal transfers (supporting consumption) and the idiosyncratic depreciation of the CLP risked raising inflation expectations further, justifying a faster withdrawal of the monetary impulse (taking the policy rate to around neutral by mid-2022).

In deliberating the two rate hike options, the Board felt the 75bp increase was the most appropriate if its aim was to frontload the stimulus withdrawal and gain policy room to potentially face scenarios with higher inflation. Given the extremely low starting point of the policy rate, the Board concurred that a swift adjustment was necessary. Stimulus measures in place were having a larger-than-expected impact on consumption, and the expansion of fiscal transfers raised risks of a slower convergence of inflation to the target. Finally, the Board was uncomfortable with the level of stimulus for an economy that was growing at a double-digit pace and had closed the negative output gap (even if the recovery of some sectors was still lagging), along with signs of a recovering labor market.  

The option of a 50bp rate hike had the advantage of not surprising the market, while the 75bp hike could rile other agents (politicians). The Board believed that an upside surprise could be beneficial for inflation expectations, but could come at the cost of a less favorable response from other agents (we read this as spurring lawmakers to advance additional stimulus measures, such as a fourth pension withdrawal or a fiscal transfer extension). In conclusion, the Board agreed that the choice of a 75bp rate hike was consistent with the updated macroeconomic scenario and had the communicational advantage of signaling a rate path well above what the market had priced in at the time.  

In our view, the policy rate is likely to end this year at 3.0% (through two additional 75-bp rate increases) and to reach 4.5% (a level above the neutral range estimated by the Central Bank) before the end of the first half of 2022. A key issue to monitor in the near term will be the debate in Congress on the fourth pension fund withdrawal (potentially leading to an even higher terminal rate). Also, the fiscal policy path outlined in the 2022 budget bill, to be sent to Congress by the end of September, will also be important for outlining potential rate paths.

Andrés Pérez M.
Vittorio Peretti