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Chile inflation rate: Aggressive rates hikes from Banco Central Chile may pay off as 2023 forecasts look optimistic

By Ryan Hogg

Edited by Vanessa Kintu

10:44, 9 December 2022

Stacks of golden coins with flag of Chile on the background.
Chile’s interest rate history has been one of relative stability. Photo: Vitalii Stock / Shutterstock

Chile’s central bank the Banco Central Chile was dealt a blow as inflation soared past expectations and laid to rest hopes of a smooth exit out of one of the more aggressive interest rate strategies seen across the globe.

Will the bank have to move forward with further rate hikes in an attempt to drop the Chile inflation rate, or will international pressures begin to subside?

What is inflation and how is it measured in Chile?

Inflation measures the rate of change in the price of a basket of goods and services, and is mainly observed on an annual basis. It’s a key indicator for policy makers. Inflation affects the cost of living and business operations.

Inflation is usually also the measure that central banks use to determine monetary policy. When inflation is above a central bank’s target, it increases interest rates to cool demand and bring prices down. When inflation is below its target, the bank reduces rates and may engage in quantitative easing to stimulate demand.

The inflation rate in Chile is measured by the statistics agency INE, which publishes figures on a monthly basis. 

The Banco Central Chile sets a 3% target for Chile’s expected inflation over a two-year period.

“Low and stable inflation contributes in several ways to greater economic growth. Above all, because this reduces uncertainty and therefore encourages investment and consumption, thus enabling more efficient resource allocation. In addition, keeping inflation low and stable benefits the poor, since they struggle the most in protecting themselves from increases in inflation,” the bank has stated.

History of inflation in ChileChile inflation rate 5-year chart

Chile’s interest rate history has been one of relative stability. In recent years the country has largely succeeded in sticking to its 2% inflation target, after a blip of prices rising by nearly 6% in 2015.

But in line with most of the world, prices began to spiral upwards at the end of 2021 and have continued to do so this year. Inflation peaked at 14.1% in August but has subsided slightly since.

Prices rose at their slowest pace on a monthly basis since February in October, rising by 0.5% and taking some heat off the economy.

But in November, inflation soared past all expectations, rising by 1% on a monthly basis and 13.3% annually in a fresh blow to the central bank’s monetary policy path. Prices were driven by increases in food, non-alcoholic beverages and transportation.

What is driving inflation in Chile?

Chile has been subject to the same constraints as many other countries as it fights pressures brought on by the Covid-19 pandemic and the effects of Russia’s invasion of Ukraine.

In September the Organisation for Economic Co-operation and Development (OECD) wrote: 

“Inflation has risen amid buoyant private consumption, further aggravated by the Russian aggression on Ukraine. Monetary authorities have acted in a timely and decisive fashion to contain inflation, and the fiscal stimulus is being withdrawn.”

In a presentation, French banking group BNP Paribas outlined the drivers of inflation in Latin America, which also included renewed lockdown measures in China:

“More recently, the inflationary shock has been amplified by the disruptions to the supply of fertilisers associated to the embargoes on Russia and Bielorussia. It should be recalled that Latin America is the 2nd most dependent region when it comes to fertiliser imports as 80% of its local needs have to be met by external markets.”

The central bank has been forced to hike interest aggressively this year in an attempt to control inflation. Rates have risen from 4% at the start of 2022 to 11.5% in one of the more aggressive instances of monetary policy across the globe.

“The Central Bank of Chile has appropriately tightened monetary policy to tame inflationary pressures and remains vigilant to risks to the macroeconomic scenario. Inflationary pressures have been significant, as global price spillovers have been compounded by domestic factors, including a very strong (yet rapidly narrowing) cyclical position, and currency depreciation.” the International Monetary Fund (IMF) wrote in October.

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“IMF staff assesses the monetary stance to be adequate. However, upside risks to inflation prevail, which might require extending the tightening cycle if inflation pressures persist. Effective communication continues to be key to preserving the long-term gains of low inflation and well-anchored expectations.”

US dollar to Chilean peso (USD/CLP) exchange rate 2022

Despite a bumpy year, in contrast to several other economies, Chile’s currency, the Chilean peso (CLP), has stayed relatively resolute against the mighty US dollar (USD), possibly aided by Chilean central bank’s aggressive push on interest rates.

Even though it fell more than 18% against the greenback at one point in mid-July, the peso is now around the same level it was in the beginning of 2022, surging 20% in six weeks.

The peso’s recovery in recent months is important for Chile in its fight against the cost of imports, which accordingly contribute to price rises. 

Chile Inflation forecasts: 2023 and beyond

Chile inflation predictions appear largely bullish about the country’s fortunes in the coming year. This could be in response to an easing of international pressures and the central bank’s aggressive interest rate agenda bearing fruit.

Panellists at Focus Economics expected inflation to end the year at 12.1%, with the Chile inflation rate in 2023 foreseen to fall to 4.8%.

Likewise, a Chile inflation forecast by Trading Economics, as of 8 December, suggested inflation could be at 12.1% at the end of the quarter, before falling to 4% in 2023 and 3% in 2024.

“Inflation and interest rates will remain well above their respective historical averages in the coming months which, coupled with minimal fiscal stimulus, will undermine purchasing power,” Fitch Solutions wrote in a note about its Chile inflation rate forecast.

“In addition, ongoing political uncertainty surrounding a second constitutional convention will keep investor sentiment muted, dragging on investment growth. However, on the external front, rebounding demand from China will support a rebound in export growth.”

In its December inflation rate forecast, Chile’s central bank said it expected prices to rise by 6.6% in December 2023, and 3.2% at the same time in 2024:

“Inflation will continue to decline and will reach the 3% target by mid-2024, in line with the activity gap turning negative next year. The Monetary Policy Rate (MPR) is at 11.25% and will remain at that level until the state of the macroeconomy indicates that the convergence process of inflation to the 3% target has been consolidated.”

In October, the IMF wrote: 

“Domestic risks relate to high inflation persisting for longer than expected, social discontent over high food and energy prices, or slow progress to meet social demands,” “The constitutional reform process is expected to continue but uncertainty over possible outcomes has narrowed.”

Note that analysts’ predictions can be wrong. Forecasts shouldn’t be used as a substitute for your own research. Always conduct your own due diligence before trading. And never invest or trade money you cannot afford to lose.

FAQs

What is the current inflation rate in Chile?

Inflation in Chile was 1% on a monthly basis in November, and 13.3% on an annual basis.

Has inflation been going up or down in Chile?

Inflation rose by 13.3% in November, surprising analysts after slowing to an eight-month low in October.

Why is inflation so high right now?

Inflation is being driven by international factors linked to the relaxation of COVID-19 restrictions and Russia’s invasion of Ukraine, which have complicated supply chains in the country.

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