Chile faces pressure to increase spending despite high inflation, Bank of America says -Breaking
SANTIAGO (Reuters). Chilean President Gabriel Boric is facing an economic slowdown with high inflation. These factors conflict with his plan to expand social programs. According to a Bank of America Report (NYSE:), released Thursday, this could lead to more financial stimulation.
A $3.7B economic recovery plan was announced by the government to help sectors affected by the COVID-19 Pandemic. The report stated that the plan was “reasonable, targeted so far” but there would be increased demand to spend.
This report states that rising food prices, weakening economic conditions and high expectations from reforms by the new government will lead to increased spending.
To block the larger withdrawals being proposed by legislators, Tuesday’s government presentation of a partial pension withdrawal plan was rejected.
According to the bank, while inflation would be less affected by the limited proposal of the government because it takes a fifth the amount from larger withdrawals, there are still risks for prices and the economy.
“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.
Also, the report stated that Chile’s central banking has adopted “dovish” rhetoric on increasing interest rates due to fears of recession. But this will be “tested with recent inflation surprises.”
Chile recorded a 1.9% monthly inflation rate in March. It was the highest since 1993.
Capital Economics has released a separate report that predicts Chile’s central banking will raise its rates by at most 200 basis points to 9% in the current cycle.
Capital Economics’ report said that this was more tightening than what the central banks’ rate corridor implied, as well as the most recent analyst consensus.