SANTIAGO: Chile’s central bank raised its interest rate by 150 basis points (bps) for the second straight meeting and said future hikes will be smaller, in a sign that policy makers are nearing the end of their aggressive tightening cycle.

       The bank board, led by its new president, Rosanna Costa, lifted the overnight rate to 7% late on Tuesday, as expected by six of 19 economists in a Bloomberg survey that had a 7.5% median estimate.

       In a statement, policy makers wrote that the economy was on a “downward path” from last year’s elevated spending level, and highlighted the “reversal in the levels of private consumption,” especially of durable goods.

       “The board considers that, if the assumptions in the central scenario of the March Monetary Policy Report (MPR) prove correct, future increases in the MPR would be smaller than those of recent quarters.

       “In any case, this will depend on the evolution of the macroeconomic scenario,” they wrote.

       The bank will publish its March policy report soon.

       The smaller-than-expected rate increase and its accompanying statement are the first under Costa, who has given few public comments since becoming president in February.

       One thing was certain though, rates were going higher, as soaring commodity prices stemming from Russia’s invasion of Ukraine exacerbate local inflation that’s been above target for about a year.

       At the same time, the bank is also keeping an eye on slowing demand.

       “The rate hike and forward guidance on Tuesday suggested the central bank was likely to continue increasing rates while inflation and inflation expectations remained under pressure, but anticipates that additional changes will be more gradual now that interest rates are consistent with tight monetary conditions and activity is falling,” said Felipe Hernandez, Bloomberg Latin America economist.

       At the same time, local credit remained weak, and consumers’ and businesses’ economic views have become more pessimistic.

       “The central bank is clearly highlighting the lower growth prospects and the clear deceleration that’s under way,” Jorge Selaive, chief economist at Scotiabank Chile, wrote on Twitter.

       He added that the peso will likely weaken against the dollar. At the same time, bank board members warned about rising inflation expectations.

       Russia’s invasion of Ukraine has driven cost increases for key goods including energy, food and some metals, they wrote.

       Indeed, annual inflation in February hit 7.8%, the fastest pace since 2008.

       Chile imports nearly all of the oil that it consumes, meaning the economy has been stung by crude prices that neared US$130 (RM547.10) a barrel earlier this month, compared to levels near US$90 (RM379) at the time of the prior rate decision in January.

       “We still see the key rate reaching 9%, but with hikes of 100bps or less in the next meetings,” said Sergio Godoy, chief economist at STF Capital.

       “It will take time for the board to start lowering rates.” Still, families are already pulling back on spending after cash transfers implemented during the throes of the pandemic were phased out.

       The government is opposing lawmaker proposals for a new round of early pension withdrawals, which helped drive economy to the point of overheating. Political uncertainty on the drafting of a new constitution is also weighing on investments. — Bloomberg