Chile faces pressure to increase spending despite high inflation, Bank of America says

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 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.

(Reporting by Carolina Pulice and Fabian Cambero; Editing by Sandra Maler)