The big surprise of the week was undoubtedly the Central Bank’s rate hike. Well, perhaps the national team’s two home wins as well, but let’s focus on the former. I doubt there’s a single market participant who didn’t expect a rise in the benchmark rate, but probably none (if you did, my apologies) anticipated a hike of this magnitude: 125 basis points. The decision, as the statement says, was made unanimously by its members and comes amid a normalization of monetary policy (following two adjustments totaling 100 basis points) driven by inflationary pressures stemming, in part, from an overheating economy. Before you ask me for the umpteenth time, no, it’s not the only reason, but it is perhaps the most important one—and the one on which the Central Bank can actually take action.

What’s interesting is that, unlike on other occasions, the causes are not linked to changes in the external environment (which, interestingly, is unfolding almost exactly as described in the latest IPoM) or to local cyclical growth. No, the causes are linked to measures that began as temporary and exceptional support for families in response to the complex situation they faced in the midst of the pandemic—measures that have become almost permanent and have led to other measures that have little to do with improving people’s well-being but rather with undermining existing institutions. For each of these discussions, Central Bank President Mario Marcel has appeared (virtually or in person) before Congress to present a technical perspective on the debate and has systematically been ignored and even personally attacked by members of parliament. Stoically, Central Bank officials have remained on the sidelines of these interpellations, even though those raising them believe that a high copper price depreciates the peso (¿). 

However, the other big surprise came in the press release itself. I must be honest and admit that I felt a certain satisfaction reading the lines where the Central Bank stopped being so politically correct and named the specific causes of financial instability and inflation: “uncertainty caused by political and legislative issues, particularly regarding new withdrawals from pension funds.” Continuing to avoid calling things by their proper names could amount to negligence, especially when some people are ready to blame the night, the beach, and the moon for rising prices, interest rates, and the exchange rate.

What’s next? More rate hikes, without a doubt—the ones needed to anchor market expectations, demonstrate commitment to its constitutional mandate, and prevent a spike in the tax that most affects low-income earners. Thus, it is most likely that in December, prior to the publication of a new IPoM, the TPM will show a further increase of around 100 basis points, closing out 2021 at 3.75%, which, according to our estimates, would place it at the upper end of the neutral range. In a simple calculation, we estimate that the nominal TPM that would replicate the effective rate seen in other periods of overheating (for example, 2012–2014) would be around 4.5%, a level that, according to our scenario, would be reached in March 2022. 

Nathan Pincheira

Chief Economist at Fynsa