Chile central bank holds benchmark rate steady even as protests hammer economy

SANTIAGO (Reuters) - Chile´s central bank said on Wednesday it would hold its benchmark interest rate steady at 1.75%, and would likely keep it there for the next several months, even as weeks of protests begin to hammer the country’s economy.

FILE PHOTO: The emblem of the Chile's Central Bank is seen at its headquarters in Santiago, Chile March 29, 2018. REUTERS/Ivan Alvarado

The bank said recently announced fiscal stimulus measures and a depreciating peso, which hit a historic low last week, could help push long-lagging inflation in the South American nation to its target, prompting its decision.

“In line with reaching our inflation goal, and in a context of greater fiscal stimulus ... the board believes that the interest rate will maintain its current level during the coming months,” the bank said in a statement.

The unanimous decision to hold rates, which upended market expectations, comes as Chile´s economy takes a sharp turn for the worse.

Economic activity in October marked the biggest year-on-year contraction in a decade, according to bank data released Monday, as riots over inequality overtook the country. Forecasts for quarterly growth and unemployment are equally dire.

The bank said the worsening outlook had given way to an “increase in uncertainty,” and had soured business and consumer confidence.

“Activity and demand have been negatively affected, and expectations for growth for this year and the next have deteriorated,” the bank said.

The most violent, widespread protests to hit Chile since its return to democracy in 1990 have left at least 26 dead. The chaos has spooked investors and tourists, hobbled ports, highways and public transportation and caused billions in losses to business.

Rating agency Fitch on Wednesday said the impact of protests may push the Chilean economy into a technical recession, expecting a contraction in the current quarter and the next.

Center-right President Sebastian Pinera has sought to mollify protesters, who demand deep social and economic reforms, with a $5.5 billion spending package and a vote on a new constitution. But many remain unsatisfied. Violence surged as recently as last week.

The bank pointed to the reforms in its statement, noting that they implied an “important increase in fiscal spending in 2020.”

Pinera´s administration plans to tap sovereign funds and increase taxes on the rich to help pay for the measures.

Protests have cooled this week, buoying markets. Chile´s blue-chip stock exchange .SPIPSA jumped 3.4% on Wednesday, while the currency CLP= gained 2%.

Reporting by Dave Sherwood; Editing by Leslie Adler and Jonathan Oatis