Chile Central Bank Sets Hawkish Tone, Warns of CPI Risks

The Central Bank of Chile has adopted a hawkish stance in recent months, aiming to combat inflation that has been persistently above the 3% target. This shift in monetary policy has significant implications for the country's economic growth trajectory, both in the short and long term. In this article, we will explore the factors contributing to the upward risk balance for inflation in Chile and how the Central Bank's commitment to maintaining a 3% inflation target impacts its monetary policy decisions, particularly in the face of global uncertainties.



The upward risk balance for inflation in Chile is primarily driven by two specific factors: the global appreciation of the dollar and the rise in domestic labor costs. These factors have contributed to the narrowing of firms' operating margins, leading to a pass-through to final prices higher than previously anticipated.

1. Global appreciation of the dollar: The appreciation of the dollar has raised the exchange rate, which has increased the cost of imports and contributed to inflationary pressures. This factor is expected to continue to influence inflation in the short term, as global uncertainty persists.
2. Rise in domestic labor costs: The increase in domestic labor costs has put upward pressure on prices, as firms pass on these higher costs to consumers. This factor is likely to remain relevant in the coming quarters, as the labor market continues to adjust to changing economic conditions.

In the medium term, cost pressures are expected to ease, and the evolution of inflation will be determined by the behavior of domestic demand, particularly the performance of household consumption. However, the risk balance for inflation remains biased upward in the short term, requiring caution from the Central Bank in assessing the timing for monetary policy rate cuts in the coming quarters.

The Central Bank of Chile is committed to maintaining a 3% inflation target, which significantly influences its monetary policy decisions, especially in the face of global uncertainties. The bank aims to ensure that inflation converges to this target over a two-year horizon. In the short term, the risk balance for inflation is biased upward, necessitating caution from the Board. This means that the Board will steadily accumulate information regarding the progress of the economy to assess the timing for monetary policy report (MPR) cuts in the coming quarters.

The Central Bank will continue to steer the monetary policy rate with the objective of ensuring that inflation converges to its 3% target. Despite the rise in short-term inflation expectations, two-year expectations remain around the 3% target. This is seen in a scenario where economic activity shows weaker than expected domestic demand and where GDP growth this year is estimated at 2.3%.

The main risks facing the Chilean economy come from abroad, mostly associated with greater uncertainty in the world. The international outlook has been marked by high degrees of uncertainty originating on different fronts, such as ongoing war tensions, fears about the global fiscal situation, and the impact of a possible reconfiguration of international trade, among other issues. The Central Bank of Chile will continue to monitor the risk trends and their potential impact on local financial conditions.

In the face of these global uncertainties, the Central Bank's commitment to maintaining a 3% inflation target remains steadfast. The Board reaffirms its commitment to conduct monetary policy with flexibility, so that projected inflation stands at 3% over the two-year horizon. This commitment helps to maintain macroeconomic balance and fosters a stable economic environment for Chile.

Word count: 598