SANTIAGO: Chile’s central bank raised its 2021 growth and inflation forecasts as the economy runs hot, a day after policy makers delivered the biggest interest rate increase in two decades.

       The economy will expand between 10.5% and 11.5%, up from the prior estimate of 8.5% to 9.5%, according to the monetary policy report published on Wednesday.

       Annual inflation will speed up to 5.7% in December, nearly double the 3% target.

       Policymakers led by Mario Marcel lifted the overnight rate by 75 basis points to 1.5% late Tuesday, surprising all analysts in a Bloomberg survey who expected a smaller hike.

       In a statement, the bank’s board wrote that emergency spending amid the pandemic has had a stronger effect than expected, leading to “extraordinary dynamism” in private consumption.

       The central bank’s board acknowledged the need to avoid “an accumulation of macroeconomic imbalances that, among other consequences, could lead to a more persistent increase in inflation,” according to the statement.

       “The board decided to intensify the withdrawal of monetary stimulus.”

       It’s the clearest sign yet policymakers are concerned about the overheating of one of Latin America’s fastest growing economies in 2021.

       Many analysts expect expansion to reach 10% this year on the back of billions of dollars in emergency spending and early pension withdrawals.

       Robust consumer demand and higher commodity costs may keep inflation above target for longer.

       Chile is removing monetary stimulus in a way that will allow the economy to cool down in a smooth fashion, Marcel told a senate hearing on Wednesday. “We are not slamming on the brakes,” he said.

       “We will continue to have expansive monetary policy through the middle of next year because we are going to be below the neutral rate,” he said. — Bloomberg