Chile faces pressure to increase spending despite high inflation, Bank of America says
2022.04.15 00:40
FILE PHOTO: Chile’s President Gabriel Boric embraces speaks during a news conference outside the former Naval Mechanics School building, also known as ESMA, in Buenos Aires, Argentina, April 5, 2022. REUTERS/Agustin Marcarian
SANTIAGO (Reuters) – Chilean President Gabriel Boric faces an economic slowdown and high inflation, which conflicts with his goal to expand social programs, and could increase pressure for more financial stimulus, according to a Bank of America (NYSE:BAC) report released on Thursday.
The government recently announced a $3.7 billion economic recovery plan to support sectors still affected by the impact of the COVID-19 pandemic and while the report states the plan is “reasonable and targeted so far … there will be pressure to spend more.”
The report says that higher food prices and a weakening economy clash with the population’s high expectations of reform from the new government and the drafting of a new constitution, putting pressure on more spending.
On Tuesday, the government presented a limited pension withdrawal plan in an attempt to block a larger withdrawal promoted by legislators.
The bank said that while the government’s limited proposal would have less impact on inflation as it represents a fifth of the money from the larger withdrawal, it still presents risks for the economy and prices.
“This is naturally less damaging than a full pension withdrawal, but it increases disposable income and may have some impact on demand and inflation,” the bank said.
The report also said that Chile’s central bank has taken a “dovish rhetoric” on raising interest rates given fears of a recession, but this will be “tested by recent inflation surprises.”
In March, Chile reported a monthly inflation rate of 1.9%, the highest level since 1993.
A separate report from Capital Economics predicts Chile’s central bank will deliver at least 200 basis points of additional rate hikes in the current cycle, to 9%.
“That’s more tightening than the path implied by the central bank’s rate corridor as well as the latest analyst consensus,” the Capital Economics report stated.
