On Tuesday, the Central Bank of Chile (BCCh) raised its monetary policy rate (MPR) by 75 basis points to leave it at 9.0%, the highest since 1998.
The Bank has raised its rate by a total of 8.5% since the cycle of hikes began in the middle of last year.
How high can the TPM go?
The Central Bank has indicated that “additional adjustments of a lesser magnitude” will be necessary.
For several months now, the Bank has been signaling that it hopes to end the rate hike cycle soon; However, since the inflation outlook in Chile has become complicated and several central banks around the world have signaled that they will raise their rates more than expected recently, the BCCh has had to recalculate its course of action.
In March the bank saw 8.5% as a sort of ceiling for the MPR in 2022, now that figure is around 10.5%.
Either way, the central bank’s intention is to slow the rise in rates. This suggests that we are not far from stopping the bulls: probably with an MPR around 9.75% – 10.0%.
Inflation hit 11.5% in May
Today, Wednesday, the CPI data for May came out, where the cumulative inflation for the last 12 months reached 11.5%; it rose 1.2% in the past month, slightly above the 1.1% expected.
The impact of external shocks is obvious.
More than half of the rise in prices in May can be explained by food – notably bread, cereals and oils – and by gasoline. This reflects the sharp rise in commodity prices globally.
The reopening of the economy has also had an impact on inflation. It should be noted that inflation excluding volatile elements slowed somewhat, from 1.1% in April to 0.9% in May.
Impact of rate hikes on assets and your investments
The monetary policy rate, or MPR, is the rate at which the central bank lends to commercial banks.
In other words, increases in MPR increase the cost at which commercial banks finance themselves, and in turn, this higher cost increases the rate that individuals and businesses must pay to obtain new loans, especially those at short term, which makes borrowing more expensive. ), and also increases the rate that the bank pays for deposited savings (it becomes more interesting to save).
By raising the benchmark rate, the central bank’s objective is to moderate spending by families and businesses, and thus reduce inflation.
How to take advantage of rate hikes?
A good opportunity to take advantage of these rate increases is to save in short-term funds, as the returns on your assets tend to move with the MPR.
Another advantage is that these assets are relatively low in volatility, so they are ideal for more conservative profiles, or for storing money for a short time.
If you want to know more about the impact of rate movements on your investments, we recommend that you read this article.
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