Monetary policy rate and fiscal deficit A colleague in work mentioned today that Chile is keeping a flat monetary policy rate given &quot;there is a higher expected fiscal deficit&quot;.
If there is an expected fiscal deficit (i.e., spending more than what you earn), why would you keep the monetary policy rate low (i.e., lend money cheaper). To me it sounds a little contradictory, but wanted to hear other views.
Is there another reasoning why you would keep a low flat monetary policity rate if there is an expected increase in the fiscal deficit?
If a country is on a deficit it would want to keep rates low since it will most likely have to borrow money to pay for it's deficit.
It also has the possibility of debasing it's currency which in turn debases it's current/future debt.