Chile Keeps 0.5% Rate With a Quarter of Country in Lockdown

Chile’s central bank held its key interest rate at a record low as expanded lockdowns against the coronavirus deliver a fresh blow to demand and confidence amid a fledgling economic recovery.

The bank’s board, led by its President Mario Marcel, held the overnight rate at 0.5% for the seventh straight meeting on Wednesday, as forecast by analysts. Policy makers also extended a credit facility by six months and expanded it by a further $10 billion.

Chile Keeps 0.5% Rate With a Quarter of Country in Lockdown

The central bank is pumping stimulus into one of Latin America’s richest economies as rising virus cases force many cities to adopt strict restrictions on movement. At the same time, a consumption boost from renewed pension withdrawals is likely to prove short-lived, while labor market informality is on the rise. That will probably keep annual inflation near the bank’s 3% target, providing space for rates to remain low.

“The increase in contagions and the establishment of major sanitary restrictions since December has been reflected in the indicators for corporate and household expectations,” the bank said in a statement accompanying today’s decision.

In its statement, the central bank also highlighted some transitory short-term pressures on consumer prices, after a 0.3% month-on-month increase in December as retailers failed to replace imported good. However, weak activity in the medium term will contain inflation.

“The central bank acknowledged that the spike in December was due to a surge in the price of imported products and may continue to affect prices in the short term,” Carolina Grunwald, chief economist at Banchile Inversiones, said.

The government this week added ten municipalities to the list of areas under 24-hour lockdown, meaning 24.5% of Chile’s population will be living under strict restrictions as of Jan. 28. While none of those areas are in the capital Santiago, the measures still pose a threat to recent gains in domestic activity.

Looking ahead, the process of re-writing Chile’s constitution this year will weigh on investments, while November’s presidential elections will add to uncertainty, Bank of America analysts led by Ana Madeira wrote in a report this month. Gross domestic product will see a moderate rebound of 3.3% in 2021, they wrote.

Financial markets expect inflation to accelerate in January on factors such as food costs. Despite those short-term pressures, economists surveyed by the central bank still see consumer prices at 3% in 11 months.

©2021 Bloomberg L.P.

BQ Install

Bloomberg Quint

Add BloombergQuint App to Home screen.