How much higher can interest rates go next year?

A little more than three months after its first increase after remaining for more than a year at its technical minimum level of 0.5%, the monetary policy interest rate (TPM= is in the race to reach its so-called “neutral” level of 3.5% in December.

This milestone, which will be earlier than expected by the Central Bank itself given the higher inflation assumed for this year (it raised the annual estimate from 4.4% to 5.7% in the last IPoM), implies that it will be at a point where it allows the economy to grow in line with its potential in line with the two-year inflation target of 3% and without shocks.

This will not happen in 2022, and experts expect the key interest rate to rise by between 100 and 250 basis points, reaching up to 6%.

“The scenario is extremely uncertain, due to both domestic and international factors,” says Gemines research manager Alejandro Fernandez, who foresees the highest level for the TPM.

Security’s macroeconomics manager, César Guzmán, explains that the Central Bank’s Board is now acting on the basis of future risks to inflation and the possibility that the fourth withdrawal will exacerbate pressure on prices in the short term is present.

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Therefore, although for LyD senior economist Tomás Flores, there is no doubt that the factors driving this consumption boom will diminish next year – which is reflected in an expected GDP growth of around 2% – inflation may take “a little longer to normalize”.

For CredicorpCapital’s senior economist, Samuel Carrasco, the trajectory of the monetary policy will continue next year conditioned to the evolution of supply restrictions, demand pressures and the exchange rate transfer (value of the dollar against the peso).

In a scenario without partial withdrawals of additional pension funds, the analyst contemplates a guiding interest rate of 5.5%.

Slightly more moderate, the economist of Banco Santander, Carmen Gloria Silva, predicts that it will be 5%, considering “that no new injections of liquidity to households materialize”, because – otherwise – the adjustments will be “more significant”.

In view of this, Guzmán affirms that “the market believes that the Central Bank is willing to raise the rate as much as necessary to curb inflation”.

According to the last consultation made by the governing body, three days before it applied the last rate adjustment that left it at 2.75%, it was assumed that inflation at 24 months would be at 3.3%, which is 0.3 points above the self-imposed goal.

And the GDP?

Thus, clarifies the chief economist of BICE Inversiones, Marco Correa, the TPM should be located at a “contractionary level, in order to contain inflation in the medium term”.

What about boosting growth? Assuming that a contractionary monetary policy will have an impact on economic activity, the economist at BCI Estudios, Felipe Ruiz, sees it possible that the rate increases will moderate towards 2022. Of course, in the mandate of the governing institute is inflation and not GDP, so he adds that this will be if inflation is contained and expectations are anchored at 3%.

Flores warns: “If the economy stagnates and inflation remains at 5%, the interest rate will rise to 5.5%.

A situation that Fernández does not rule out. “Chile has a high risk of entering stagflation in the second half of 2022, but conditions can change a lot depending on what happens in the coming months,” he says.