Chile’s Congress approved the 2013 budget proposal, raising spending by 5 percent above inflation and potentially adding to pressure on the central bank to raise interest rates as the current account gap widens.
The bill will now go to President Sebastian Pinera for final approval after a clause on regulations for vaccinations was removed, the government’s Budget Office said in an e-mailed response to questions.
Authorities will be tempted to expand expenditure more than planned ahead of elections in November 2013, and as the economy is forecast to grow 4.8 percent, economist Jorge Selaive said. With state spending stimulating growth, the onus falls on the central bank to moderate internal demand and narrow the current account gap, he said.
“Monetary policy will have to be more restrictive because fiscal policy is being very expansive,” Selaive, chief economist at Banco de Credito e Inversiones (BCI), said by phone from Santiago Nov. 26. “The central bank will have to start taking charge of this current account deficit.”
Chile had a current account gap equivalent to 7.4 percent of gross domestic product in the third quarter, compared with a 2.7 percent deficit in the second quarter and 0.3 percent surplus in the first. Imports grew 2.5 percent in the third quarter from the year before, while exports fell 3.4 percent.
Fiscal spending will rise 6.3 percent in 2012 as the economy expands a little faster than 5 percent, Budget Office Director Rosanna Costa told reporters Oct. 30. Public spending expanded 3.3 percent in 2011, when GDP climbed 6 percent.
Policy makers have kept their benchmark interest rate unchanged at 5 percent for 10 straight months following a cut in January that surprised economists. Analysts surveyed yesterday by the central bank expect borrowing costs to remain at 5 percent through next year before rising to 5.25 percent by December 2014.
To contact the reporter on this story: Randall Woods in Santiago at email@example.com.