Chile Gives Strongest Signal Yet That Rate Hikes Are Coming

(Bloomberg) -- Chile’s central bank gave the strongest signal yet that it’s nearing the first interest rate increase since 2019, citing factors including dynamic consumption and fresh support for private spending.

The bank’s board, led by its President Mario Marcel, kept the overnight rate unchanged at a record low of 0.5% on Tuesday. In an accompanying statement, policy makers wrote that fiscal stimulus has been “significantly extended” and a new round of pension withdrawals further strengthened private spending.

“The strong dynamism already present in consumption and the additional boost to private spending are an important change for the macroeconomic scenario of the coming months, which makes it necessary to recalibrate the expansiveness of monetary policy going forward,” the bank board wrote in a statement.

Strong domestic demand has helped Chile’s economic activity hold up better than expected this year despite a lagging labor market and a fresh surge in coronavirus cases. An improving global backdrop has also boosted prices of copper, the nation’s top export. Meanwhile, annual inflation has surged to the the highest level in over a year, well exceeding the 3% target.

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“The statement is clearly preparing financial markets for an interest rate increase this year,” said Martina Ogaz, an economist at Euroamerica. “It gives clear signals regarding dynamism that’s connected to consumption and private spending in general.”

Chile would join a growing number of emerging markets from Brazil to Russia that are raising borrowing costs as growth recovers from a pandemic-driven downturn and commodity costs rise.

Annual inflation sped up to 3.6% in May from 3.3% the month before amid higher transport costs, according to government data released earlier Tuesday. Part of the increase can be attributed to temporary base effects, with comparisons to the year-ago period when the first wave of the pandemic swept the country.

Still, some investors are skeptical of the current central bank forecast showing inflation easing back to target in December. In the statement, policy makers wrote that strong demand has pressured price increases for goods.

The bank will publish updated estimates for economic growth and consumer prices on Wednesday in its monetary policy report.

‘Heterogeneous Improvement’

Regarding unconventional measures, the bank board wrote the period of reinvestment of bank bond coupons concluded in early June. “From now onwards, the stock will be gradually reduced as the assets in the portfolio are extinguished,” they wrote.

Chile’s recovery is still being tested by a virus surge that’s overwhelmed hospitals and prompted the government to extend border closures through June. The slow pace of hiring is also weighing on the economic outlook, as the jobless rate has remained stuck in the double-digits for the past year.

“The labor market continues to exhibit heterogeneous improvement, with self-employment and informal salaried employment, low-skilled workers and women lagging the furthest behind,” the central bank board wrote.

Meanwhile, Chile is entering a period of high political uncertainty marked by the drafting of a new constitution and November’s presidential election.

Read more: Chile Assets Dive as Government Suffers Crushing Vote Defeat

“The process of rate normalization will be highly conditional on the evolution of investment and employment, as well as sanitary conditions,” according to a research note from Scotiabank signed by Chief Economist Jorge Selaive.

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