Too Hot to Trot: Chile’s Economic Recovery and Rising Interest Rates

October 19,2021

Chile will see economic growth of approximately 11% in 2021, a significant rebound from the pandemic-induced 5.8% drop the previous year.  Behind this recovery are several factors, among which are Chile’s impressive vaccination campaign that has seen more than 75% of the population fully vaccinated; an aggressive economic response characterized by a mix of transfers and programs targeting the most vulnerable; and perhaps more than anything, constitutionally approved withdrawals of pension funds that to date have reached nearly US $ 50 billion, equivalent to 17% of GDP.  Not to be tempered, the government is considering yet a fourth pension withdrawal, which could release and additional US $17 billion into the economy by the end of 2021.

All of this good news, however, has taken place in a context of high political uncertainty, ahead of Presidential and Parliamentary elections in November and December, as well as amid the process to draft a new constitution.  Such uncertainty has contributed to the Chilean peso being one of the region’s most depreciated currencies in 2021, and by extension, inflationary pressures.  With clear signs of overheating, Chile’s 5.3% inflation -- nearly double the two-year 3% target – has triggered a response from the monetary authority. For the December 2021 meeting, the monetary policy rate (MPR) is expected to rise by an additional 50 basis points to 3.25%, while for next year, the expectations for the MPR are around 5%, although a higher increase cannot be ruled out.