Chile central bank debating when to tighten policy

The BCCh minutes indicates a hike is coming. The minutes from the September meeting, suggests a split decision: three board members voted to stay on hold while one board member voted for a 25bp rate increase. Clearly, the minutes show that the board is concerned with the inflation rate being above the 4% upper limit of the target range since April 2014, with few signs yet that it is on a downward trend (inflation actually rose further in August). 

Market-implied inflation expectations for the next two years and beyond have increased steadily in the last few months, leading the central bank to clearly signal that it will need to hike rates in the near future, by around 50/75bp. However, the economic recovery has been, so far, slower than anticipated. China's slowdown and copper prices imply downside risks to growth. 

Having already decided that a tightening cycle is required, the debate within the board is about timing. The consensus view among board members appears to be that the market has rushed to price more (and sooner) interest rate hikes than the board's baseline scenario. 

"We maintain our forecast that the BCCh will hike 25bp at its next meeting in October, but with risks clearly biased toward postponing hikes to November or December. The behavior of market-implied inflation expectations will be a key driver of next month's decision", says BofA Merrill Lynch.