(Bloomberg) — Chile’s central bank reduced its forecast for an economic contraction this year as early pension withdrawals, record-low interest rates and government handouts boost consumer spending.
Gross domestic product will shrink 4.5% to 5.5%, versus the previous forecast for a drop of 5.5% to 7.5%, according to the quarterly monetary policy report published Wednesday. Policy makers lifted their year-end inflation call to 2.4% while also forecasting shallower drops in investment and domestic demand.
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The central bank said a new law allowing citizens to tap part of their pension savings will amount to roughly 6% of GDP, of which half will be spent on consumption in 2020 and early 2021. Policy makers “describe this measure’s impact on domestic demand and activity as very significant in the short-term. For the long-term, it’s also important to note the need to consider its effect on savings, investment and growth.”
The report comes hours after the central bank held its benchmark interest rate unchanged at a record low of 0.5% amid below-target inflation, while hinting that borrowing costs may start to rise again earlier than previously forecast. A slowdown in the spread of the coronavirus has allowed the government to lift restrictions in some cities, helping consumer spending.
Read more: Chileans Swamp Pension Offices as Pinera Concedes Defeat
The bank “forecasts that the key rate will continue at its minimum level for most of the monetary policy horizon of two years,” policy makers said in a statement accompanying Tuesday’s decision. The bank had previously said it would remain on hold for “all of the forecast horizon.”
“The central bank is signaling that it is becoming a bit more hawkish,” said Sergio Godoy, chief economist at STF Capital. Some numbers have improved recently, fiscal stimulus has increased since the previous statement and high-frequency data shows that August was better than July, “but it’s hard to get enthusiastic in the middle of the pandemic,” Godoy said.
While economic activity is beginning to pick up, inflation remains subdued at 2.5%, below the central bank’s 3% target. One-year inflation breakevens are trading at roughly 2.3% after reaching 1% in June, which was the lowest since the 2009 financial crisis.
Aside from cutting borrowing costs, the monetary authority has implemented credit lines for banks to lend to smaller companies and bought bank bonds in the secondary market to boost liquidity. Lawmakers also recently gave the central bank legal permission to buy Treasury bonds in the secondary market under certain conditions.
(Re-tops story with central bank revisions from monetary policy report)
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