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Chile raises rate more than expected to curb inflation

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     Chile’s central bank raised its benchmark interest rate for the second month in a row and by more than expected to prevent a persistent rise in inflation that could exceed the bank’s target in two years.
     The Central Bank of Chile’s board raised its monetary policy interest rate by 75 basis points to 1.5 percent, higher than the 25 points expected by most economists, as the board said it had decided in a unanimous decision to “intensify the withdrawal of monetary stimulus.”
     The central bank has now raised its policy rate by a total of 100 points this year following a 25-point hike in July, the bank’s first rate hike in 2-1/2 years. 
     Last year Chile’s central bank cut its policy interest rate twice during the month of March by a total of 1.25 percentage points and is now rapidly rolling back this easing in the face of booming consumption that has been unleashed by fiscal stimulus and early pension withdrawals.
     The bank’s board said the monetary policy report, which will be published tomorrow, will reveal further details about the bank’s forecast and risks along with the implications this has for the policy rate.
     Chile’s inflation rate has been rising in the last five months and rose to 4.5 percent in July – well above the central bank’s midpoint target of 3.0 percent – and the bank said short-term inflation expectations have risen and the survey of financial market participants showed inflation expectations in 2 years of up to 3.5 percent.
      In addition to a boom in consumption – retail sales in soared by an annual 66 percent in June and 72 percent in May – the central bank said investment had also surprised to the upside and the rise in wages is consisted with a growing shortage of manpower.
      The high growth in economic activity and the strong expansion in consumption practically closed the output gap in the second quarter and will turn positive in the future, raising the pressure on prices, the bank said, adding this implies a rise in inflation.
     Chile’s gross domestic product surged 18.1 percent in the second quarter from the same quarter last year, the highest growth rate on record and stronger than forecast by the bank in its June policy report.
     The central bank has forecast growth this year of 8.5 – 9.5 percent.
     ”The composition of spending showed an extraordinary dynamism in private consumption, which exceeded expectations and shows that injections of household liquidity is having a greater impact on consumption than expected,” the central bank said, adding data from the beginning of the third quarter confirms the continuation of this trend.


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