MNI Chile Central Bank Review - Aug'21: Takes Hawkish Route

Executive Summary:

• The Chilean central bank took the hawkish route at Tuesday's rate decision, hiking rates by 75bps to 1.50% from 0.75% previously.
• The bank's statement flagged that economic growth and consumption has strengthened, implying faster pipeline inflation.
• The larger-than-expected rate hike is likely a one-off to get ahead of any de-anchoring of inflation expectations and may not signal the start of a tightening cycle comprised of several rate hikes of the same magnitude.

MNIBCCHRevAug21.pdf

In the unanimous decision, the board cited fuel prices, 'extraordinary' dynamism in consumption, the soon-to-turn positive output gap and liquidity injections as fuelling inflation - a sign that many on the sell-side have interpreted as leading to a faster tightening cycle in Chile.

The day following the decision, Chile released their September Monetary Policy Report, detailing more of the thinking behind the Tuesday rate decision. In the release, the bank upgraded their GDP and inflation forecasts for 2021, with markets focussing on the sizeable upgrade to 2021 inflation projections.

Nonetheless, the bank's quarterly forecasts suggest the bank board see pressures on consumption, inflation and growth as temporary and driven by exogenous factors. The most notable being the "strong dynamism of consumption" driven by pension withdrawals, currency weakness and government spending. The BCCh see this effects fading through the end of 2021 and into 2022, thereby moderating inflation and bring price levels back toward target. This suggests that August's 75bps hike is a strong start to the tightening cycle, but the pace of rate rises may not be maintained going forward, with 25bps – and possibly 50bps – hikes more likely at upcoming meetings.