Central Bank President on Fuel Price Increase: "We will act promptly to control inflation."

After the inflationary shocks caused by the impact of the war in Ukraine and the adjustment of electricity rates, the Central Bank (BC) was preparing this year to finally resume compliance with the inflation target of 3%. However, everything changed with the armed conflict in the Middle East, which is generating a strong blow to fuel prices. This new scenario was acknowledged on Wednesday by the governing body with the release of its Monetary Policy Report (Ipom) for March, where it raised its inflation projection for 2026 to 4% and cut its GDP estimate to 1.

5%-2. 5%, with implications for its monetary policy as well. This occurred just as the government of José Antonio Kast approved a drastic increase in gasoline and diesel prices.

Rosanna Costa, president of the BC, delves into what the current context means for the Chilean economy, warning of the high degree of uncertainty faced, but assuring that her institution will act “in a timely manner to control inflation,” remaining especially attentive to “the alternative scenarios” presented in the Ipom. Did the effects of the war in Iran undermine a year that, until that moment, seemed quite favorable for Chile? - What we had in the December report was a growth forecast for the local economy of between 2% and 3%.

After that, we saw a global economy that was even more resilient, and the National Accounts figures for the third and fourth quarters in the U. S. , despite the government shutdown, turned out better.

The European economy also had somewhat better results, and China finally reached 5% growth. So, at the beginning of the…

For now, we are anchoring ourselves in the market's outlook, using the implicit reading from the average future prices of fuels. Around that scenario, there could be a prolonged war with more damage, or it could end sooner. But with a month of war, are there already damages to the global economy and to the Chilean economy, even if the conflict were to end now?

- It is not easy to know the level of damage to the logistical and productive infrastructure in the Middle East where oil is produced, but what is implicit in our projections is a war that ends reasonably soon, but still lasts a few more weeks. After that, prices start to decrease, but remain above what we had before. This implies that the damages are limited and that the Strait of Hormuz opens.

However, it is difficult to know today what level of damage may be inherited from this armed conflict, which is why we have been vocal in saying that we will evaluate different scenarios, and although it is desirable to provide markets with greater certainties, we must provide certainties that exist. In inflationary terms, would it have made any difference for the country if the internal fuel price increase had been implemented more gradually rather than all at once as the Kast government decided? - The Mepco is a mechanism that smooths out prices, but sooner or later it ends up passing through to consumers.

It is difficult to predict how the war will evolve, but in a continuing war, prices end up being passed on, and thus the accumulated inflationary effect would be what we are currently seeing. Now, the decision is known to the Minister of Finance. It is a political decision, made in his role as Minister of Finance, knowing the restrictions he has at this moment, and it is not my place to evaluate it.

But also knowing the consequences... Certainly. In that sense, would any of the projections in this Ipom have changed if, for example, only half of the impact had been passed on initially?

- There could be a change in the monthly transfer of costs, but ultimately, the final impact would have reached prices at some point. I cannot hypothesize many transfer options in this circumstance. The real scenario we have is what is in the report.

Did you know Jorge Quiroz? What is your opinion of the Minister of Finance? - The Minister of Finance is an economist who knows his trade, understands the markets, and I have a good opinion of him.

How many coordination meetings between the BC and the Ministry of Finance, with you and Quiroz present, have taken place in these 15 days of the new government? - Physically present, one. Conversations, several.

And was he at the Monetary Policy Meeting (RPM) this Tuesday? - At the RPM, his economist Alejandro Guin-Po was present. He regretted it very much, but he was at Congress.

When did Quiroz inform the BC about the magnitude of the fuel price increase that would be passed on? - In conversations, he communicated to us, and the public also knew, that he would conduct a review. The exact figures, the exact value of the parameters, are sent by the CNE on the last day.

So on Monday, we learned the final values and worked with those values. As a result of the armed conflict, inflation by December will again be above the 3% target, marking six consecutive years. Is this not costly for the reputation of the BC?

- We expect inflation to be at 3. 2% in 2024, so the shock from the war in Ukraine in 2022 will close within the BC's horizon. At that time, there was another shock, which was the electricity rates from 2024-2026.

And at the beginning of 2026, we return to 3%. In these two cases, we managed to control inflation and did so at the lowest possible cost, which can be verified when one looks at the trajectory of activity gaps. Well, now there is another shock, and it was not possible to anticipate it.

But we will work towards the convergence of inflation again because it is our role and because it is the way we can provide well-being to the population. It may be difficult to convey, but I believe there is confidence. How at risk is it that inflation will exceed the 4% currently projected for the year?

- It is possible that the transmission of costs, the inflationary dynamics, may be somewhat more persistent, yes, and also if this occurs in an environment where we have more dynamic demand, we could have a factor that is somewhat more inflationary and that would require some different monetary policy effort. But there are also possible scenarios in which the effect of the armed conflict is much greater, which could also combine with a financial channel that tightens financial conditions, and in that sense, the effects on activity in the medium term would require a balance between these short-term and medium-term inflationary impacts, which may be different and in opposite directions. There are many possible scenarios, and that is why there is a somewhat different message from the Central Bank this time.

In this case, we said, 'we will be evaluating scenarios meeting by meeting to make decisions in the context of a very uncertain scenario. ' Does that mean that this time alternative scenarios are more valid than on other occasions? - We are saying that we have a more uncertain scenario and that, therefore, we are open to looking closely and evaluating alternative scenarios.

There is more uncertainty regarding the evolution of the various elements behind the central scenario, and therefore it needs to be monitored. How concerned are you about the speed of the transmission of this inflationary effect and its dissemination? - We have a central scenario that uses the judgment that the transmission and persistence (of inflation) will follow a pattern similar to historical averages.

Therefore, if that does not happen, it is a scenario that needs to be evaluated and quantified to make decisions going forward. And how do you cut the second-round effects of this inflationary shock without, in principle, using monetary policy? - When looking at the inflation projection and comparing it with December's, where the increase in fuel prices plays a significant role, the first thing is a direct shock on the price of gasoline and diesel that we will see immediately in the total CPI through its volatile energy component.

But from there, with a certain lag, various prices will be affected through transportation costs and through the production costs that impact different products and industries, depending on margins and demand reactions. There is a process that gets passed on to other prices, which is what you mentioned, and this is incorporated through the non-volatile component of the basket, which will also experience an increase by the end of the year compared to what we had in December. If we put numbers to it, in the fourth quarter of this year, we expect that in the non-volatile part, inflation will be around 30 basis points higher, and total inflation around 80 basis points higher.

Can the magnitude of this inflationary shock from oil and fuels be compared to that of electricity rates? - The direct impact on the CPI basket may be similar to that of electricity rates, but the current shock carries uncertainty and unknown temporality. The direct effects will mostly be seen in the second quarter, but there are other second-round effects that, in this case, may be more relevant, related to the cost pass-through to prices, which we need to monitor and which occur with more lag.

Will the dollar in Chile also put upward pressure on inflation? - The real exchange rate we are considering in the central scenario has a fairly similar evolution to what it had in the December report. It is moving towards long-term levels without large fluctuations and would not be influencing.

What is the Central Bank's message to the public, who are already anticipating that practically all prices will rise significantly again? - The message is that the Central Bank will do its job as it has persistently done. It has its commitment, and we will act in a timely manner to control inflation.

It is the task of the Central Bank, and we know how important it is for the well-being of people. In this scenario, have the rate cuts by the Central Bank come to an end for the remainder of 2026? - Again, in an open and volatile scenario, what happens going forward will be evaluated based on how the situation develops, and accordingly, we will make decisions at each meeting.

This event finds us in a situation where we had inflation under control, with no activity gaps and with the Monetary Policy Rate around neutral, which gives us room to act. Could the current shock require a rate hike? - There is a corridor of rates that indicates different sensitivity scenarios, but today what we see is that for this meeting we maintained the rate, and from here on, we will carefully evaluate alternative scenarios in this very uncertain context.

Activity and investment The BC also cut its growth estimate for the economy for 2026 by half a point, to 1. 5%-2. 5%.

How much of that corresponds to the effect of the war and how much to other elements? - In the GDP growth estimate for this year, on one hand, we must recognize the resilience of the global economy at the end of 2025 and the beginning of 2026, which is moving upwards. On the contrary, there is mining, but there are two other relevant effects: the war and fiscal policy, where we are including in this report the cut that is in the Ministry of Finance's mandate, amounting to $3.

8 billion. The combination of these elements is what gives us the cut in the growth range we have for 2026, and going forward, we maintain the ranges we had. In that sense, what is the biggest threat to the Chilean economy growing around 2%, as the BC predicts this year?

- I have mentioned several times that scenarios can vary and mutate based on the external environment... So is it the war? - The war is there.

That said, we have just reviewed the trend growth, and it is also around 2%. So in the end, we have an expansion range that is around the long-term trend growth as well. What we have in the lower end of the corridor is precisely a much more intense war, with impacts on much tighter financial conditions.

That would lead to a more negative scenario, where geopolitical risks remain within various price levels. When one looks at the evolution of futures for oil prices, although a decrease is observed, it remains at higher levels. So, one interpretation of that could be that this is a tension zone where certain risk premiums will likely remain around certain prices.

Why in this Ipom, thinking about activity, were the potential effects of the reconstruction plan recently announced by the Kast government not included? - Methodologically, we are very precise, and we have said this on other occasions: what enters our scenario are those concrete things that are approved by law, that are sufficiently outlined and backed, and that are therefore viable to be incorporated. The element that meets that criterion is the fiscal cut mandate, which is quite mandatory and signed by the Minister of Finance.

In the other case, that does not exist. Legislative projects enter Parliament, where the debate takes place, and there they are finalized. The Kast administration has among its objectives for Chile to return to grow at a rate of 4% by the end of its term.

Do you see that as possible? - I think having goals is positive. One can grow more than the trend GDP for a relatively short period, but in the end, trend growth, by definition, shows the growth that is sustainable in the long term.

Yes, it can rise from the 2% we have today, but that requires more structural changes in terms of things that increase productivity. For example, elements that improve resource allocation, investment projects. There has been much talk about permits; that has not been implemented, and there is probably more to be done in that area.

Competition, everything that supports productivity would help, but it needs to be worked on. Everything related to increasing the labor supply and its quality, greater labor participation, and investment and its quality. On Wednesday in Congress, Minister Quiroz said that the BC still cannot consider in its projections other things “that we are going to do (…), particularly in terms of aggregate supply.

” Will you incorporate them as they materialize? - We incorporate into our projections those things that are already sufficiently solid and defined. Some of the elements he mentions probably need legislative projects.

One has to wait for the debate on the bill and know definitively what is approved, and only then do we incorporate it. Quiroz also stated that “we will have extraordinary news regarding investment in Chile. ” However, the BC cut its estimate for investment growth for 2026 and kept it quite limited for 2027 and 2028.

- What we have in the investment projection is that there is some expectation due to the war, but basically, the cut in public investment is present. In investment, the inventory still shows growth, but it remains very concentrated in the energy and mining sectors. We still do not see more solid evidence in the rest of the sectors.

And why, if it was growing at rates of almost 10% in the third and fourth quarters of 2025, has that now slowed to almost half? - The private investment component was very dynamic, and what this report does is smooth the growth rate going forward. Recent imports of capital goods continue to show high growth rates, but not the ones we were seeing.

There is also an effect from public investment. She began her last year as president of the Central Bank, but she will have another two years as a councilor afterward. If José Antonio Kast offered her to continue as president, would she consider it?

- I am very focused on finishing my term this year, especially with a new inflationary challenge. I must complete my task, and then I will project myself forward. But you are not closing the door to the possibility?

- We are facing a very challenging international situation. When we had inflation at 2. 4%, we received a new shock, and we have to work on that.

That is what we are doing. In this Ipom, the BC revised the calculation of the trend GDP of the Chilean economy from 1. 8% to 1.

9%. While it improves, the advance seems marginal... - That is how I see it.

This is an estimated value of an unobserved variable. I do not see significant differences when looking at it over 10 years or five years. For the purposes of the BC's use of trend GDP, it did not change the scenarios we were working with.

What prompted the small improvement? - We had not made this review of trend growth while waiting for the new population projections from the INE. Having conducted the Census and its projections, we incorporated it, and there is a small difference.

The change rests on the population projections. And therefore, is it still a very low trend GDP for the needs and demands of the country? - Clearly, it does not meet the aspirations that I mostly read, and there is a considerable effort and demand to grow more sustainably.

In this update, did you not consider a report from the Ministries of Economy and Finance of the Boric government, which estimates that the reforms on permits and pensions could add 0. 4 percentage points to trend GDP in 2026-2030? - We use the same methodology as always, which is similar to that used by the Productivity Commission, and which gives us similar aggregate growth results.

And why do you not consider the impact of reforms that are structural and already being implemented? - Because we do not know their direct impact, but we do have, along with trend growth, two alternative scenarios, one with higher growth and one with lower growth, outlining what would happen if there are some productivity elements that may be greater or lesser. Would these types of reforms, if they have an impact, need to reflect a higher productivity, and thus raise the trend GDP?

- If they have an impact on total factor productivity, we would have to see it there, and if they manage to increase investment, it will be measured in the capital stock. On Wednesday, during her presentation of the Ipom before the Senate Finance Committee, Rosanna Costa was questioned by both Senator Paulina Vodanovic (PS) and Senator Diego Ibáñez (FA) about the message issued by the government on its social media, which referred to a “State in bankruptcy” to argue the lack of fiscal space to address the rising fuel prices. The president of the Central Bank did not shy away from the question and responded, among other things, that she agreed with “the statements of the minister (Quiroz)” on the matter, and that the term used “is not the most fortunate.

” In the middle of the week, a controversy arose following a publication by the Executive stating that the Kast administration received a “State in bankruptcy. ” When asked about it, you stated that “it is not the way to carry the debate regarding the fiscal situation. ” Why did you decide to intervene in that debate?

- It was worth clarifying. The issue is not foreign to the Central Bank in its more financial analysis perspective. With everything that happened as a result, including the government withdrawing the questioned text from its social media, do you consider that your point was validated?

- I have nothing more to add to what I have already expressed.