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Chile opens door to rate hike after increased demand

(Bloomberg) – Chile’s central bank said it will recalibrate monetary policy after keeping its key rate at an all-time low, as economic activity and consumer demand pick up in the South American nation.

This Tuesday, the bank’s board of directors, headed by its president, Mario Marcel, kept the overnight interest rate unchanged at 0.5%. The decision was expected by the 11 analysts surveyed by Bloomberg.

“The high dynamism already exhibited by consumption and the additional boost to private spending represent a relevant change for the macroeconomic scenario in the coming months, which makes it necessary to recalibrate the expansionary monetary policy in the future,” said the bank in a release.

Policymakers also noted that they plan to undo some unconventional measures implemented to reduce volatility, such as reinvesting bank bond coupons according to the maturity of portfolio assets.

Although the labor market is still lagging, strong domestic demand due to higher public spending and withdrawals from pension fund accounts have helped economic activity to hold up better than expected. In addition, annual inflation is at the highest level in more than a year, surpassing the goal of 3%. Still, covid cases again approached a record high this month.

Annual inflation accelerated to 3.6% in May from 3.3% the previous month, according to government data released Tuesday. Part of the increase can be attributed to temporary base effects, compared to the period a year ago when the first wave of the pandemic struck.

Chile’s recovery is being tested by a wave of infections that has overwhelmed hospitals and prompted the government to extend border closures until June. Slow hiring is also weighing on the economic outlook, as the unemployment rate has remained stagnant in double digits over the past year.

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Meanwhile, Chile is entering a period of high political uncertainty marked by the drafting of a new Constitution and the presidential elections in November.

Original Note: Chile Central Bank Opens Door to Rate Hikes on Demand Surge (1)

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