Chilean Interest Rates Have Doubled

Chile raises interest rates by 1.5% to 5.5%.

A month ago, it increased rates by 1.25%.

Rates have now  doubled within 35 days, moving from 2.75% to 5.5%.This has also driven the Chilean Peso higher by 10% within the past month.

Although, this was also a move by the Chilean central bank playing catch-up to the the 10 year bond market for Chilean 10’s already doubled in the preceding 10 months.

Upon announcing the last 2 rate hikes, the 10’s fell and held steady to meet where the central bank have moved up to.

G7 central banks are facing a similar scenario of being behind the curve, that the market is already throwing them.

I understand some extent of the G7’s wait and see stance because Chile’s risk is that have hiked too aggressively.

If they have and they need to adjust rates lower, the correlation of Chilean 10′ to the USD price of Copper may remain in sync.

Importantly, Chile is yet another commodity sensitive country to raise rates in order to stifle inflation.

Similarly to Australia, its central bank inflation target is 2%-3%.

While Australia printed an inflation rate of 3.5%, Chile’s inflation came in at 7%.

Incidentally, Canada’s inflation target is 2% and their inflation for the December quarter just came in at 4.5%. Their central bank governor has just signalled higher rates are coming.

This will be equally interesting to watch, because Canada’s citizen’s are as heavily indebted as the Australian’s.

As per my post, the citizen’s of Chile, Mexico, Brazil, Russia don’t have such a heavy debt burden.It’s the rising cost of living that hurts them more, not servicing interest repayments.

Albeit Chile has a good to high standard of living and is considered the richest country in South America, its GDP per capita basis is similar to Trinidad & Tobago, Romania, Bulgaria and the Seychelles.

Hence, I’ll repeat a sentence from my post, Inflation remains a tax that the ‘poor’ can’t afford to pay.

What is even more interesting is Chile’s share of the world’s copper exports.

47% of Chile’s exports are Copper related (equalling $32 billion worth) making them the world’s largest exporter of such.

While Chile exports 31% of world’s annual Copper Ore, (Peru is 2nd at 20%), it also produces and exports 22% of the world’s refined copper. Russia is next largest at 7%.

Similar to ‘Petro-Nations’ needing Petro-Dollars, Chile needs Copper receipts….and perhaps it needs to export more Copper in order to make up for the less Peso’s being received.

This would likely result in more Copper hitting the market, especially while Copper is trading near 10 year highs.

January 28, 2022

by Rob Zdravevski

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