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Chile sharply hikes interest rate as inflation heats up

(Adds details from central bank statement)

By Fabian Cambero

SANTIAGO, Oct 13 (Reuters) – Chile’s central bank sharply hiked the country’s benchmark interest rate to 2.75% on Wednesday from 1.5% previously, as the Andean country’s economy rebounds strongly from the coronavirus pandemic and the government grapples with high inflation.

The move, which was far higher than projections by traders and analysts, follows a hike in late August by the bank. Regional neighbors including Peru and Brazil have also hiked their benchmark rates this year to help tamp down rising prices.

The bank said the board had agreed unanimously on the rate hike, which was well above expectations for a new rate of 2.25% from traders and analysts.

Chile’s central bank has gradually tightened the purse strings since July, when it increased the policy rate by 25 basis points after keeping it for more than a year at the technical minimum level of 0.5%.

“The evolution of the macroeconomic scenario has increased risks for inflation convergence to the 3% target within the policy horizon,” the central bank said in a statement.

The bank added that the board had also agreed to suspend its reserve accumulation program started in January this year, due to recent market changes and the level of international reserves already reached.

Domestic consumption in Chile has been partly driven by economic aid launched by the government to counteract the impact on families of the coronavirus pandemic, as well as partial withdrawals of savings from pension funds approved by Congress.

The central bank has warned previously that a bill that allows a fourth withdrawal of funds could deepen the inflationary pressures brought about by the accelerated economic recovery of the world’s largest copper producer.

The bank added that the trajectory of the policy rate will be evaluated again in its December report, “bearing in mind the need to avoid a more persistent increase in inflation.” (Reporting by Fabian Cambero; Writing by Hugh Bronstein; Editing by Rosalba O’Brien)

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