Chile Central Bank Head Says Economy Can Ride Out Lockdowns

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Chile’s economy is more resilient to coronavirus lockdowns than last year and the impact on activity from sprawling new restrictions will be mild, central bank President Mario Marcel said in an interview.

The country’s output gap is closing faster than expected, and Chile is experiencing inflationary pressure from oil and transportation costs, Marcel said on Friday in a Bloomberg TV interview. In that context, the bank board will assess the possibility of an interest rate hike over the next few meetings.

“It’s certainly coming this year,” he said.

Chile Central Bank Head Says Economy Can Ride Out Lockdowns

He added that the bank will evaluate whether the output gap, or the difference between the economy’s potential and actual growth, will continue to close in a sustained way. “Right now, inflation is not extremely far from our target. It looks like there is policy space to assess and make a good decision.”

Chile is moving closer to joining emerging markets including Russia and Brazil that are raising rates as economic activity and inflation roar back from a pandemic-driven slump. Policy makers expect gross domestic product to leap 8.5-9.5% this year, while consumer prices surge well above the 3% target. The outlook will be challenged by the fresh lockdowns and also unemployment.

President Sebastian Pinera’s administration announced this week it will reimpose strict quarantines on the capital city of Santiago, which is home to roughly 40% of Chile’s population. Daily virus counts have neared a record high this month, and hospitals nationwide are near capacity.

Higher Rates

Higher rates in Chile are “imminent,” as there’s little value in delaying policy normalization, analysts at Goldman Sachs Group Inc. wrote in a research note this week. Both economists and traders surveyed by the monetary authority expect borrowing costs to rise from a record low by year-end.

Stimulus including pension withdrawals and emergency spending is spurring demand in one of Latin America’s richest nations. The interest rate has been held at the technical minimum for over a year, and the government recently expanded aid for families and announced cash transfers to small businesses.

Chile Central Bank Head Says Economy Can Ride Out Lockdowns

“Starting now in June, we will have the additional impulse of these fiscal measures that will provide subsidies to 15 million people in the country,” said Marcel. “That’s a very important impulse on demand.”

A firming recovery and rising commodity costs will propel annual inflation to 4.4% in December, according to central bank estimates. Policy makers expect consumer prices to ease back toward target during the course of 2022.

“There is a risk that we may have more permanent pressure on prices,” said Marcel. “The kind of pressures that we should be more concerned about are those that come from economic activity and demand. That is why we are changing our monetary policy guidance. We are prepared to respond.”

Economic activity fell less than forecast in April despite strict quarantines that were imposed on nearly the entire population. In a further sign of strength, the jobless rate ticked down that month, surprising analysts who expected unemployment to rise amid the new wave of restrictions.

©2021 Bloomberg L.P.

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