Chilean central bank to maintain wait-and-see stance in November

The Chilean central bank has adopted a wait-and-see stance in 2016 following its hawkish moves of the fourth quarter of 2015. The BCCh is expected to continue with its wait-and-see mode but downside risk has increased in the near term, said Societe Generale in a research note. During its recent meetings, the central bank has continued to comment on subdued aggregate demand, especially investment demand, and has anticipated the economy to grow below potential in 2016.  The economy is expected to grow 1.6 percent in 2016.

On the external front, the monetary policy stance is dominated by the sustainability of Chinese economic recovery and the Fed’s rate normalization process. These factors continue to pose risks. In the meantime, Donald Trump’s victory in the U.S. presidential elections might also set off new financial volatility episodes. The global growth outlook and the outlook of Chile’s trading partners has not rebounded much, which implies that the external support for Chile’s economy might remain subdued.

The central bank has continued to stay on a neutral stance during its past few meetings, which suggests that it sees merit in maintaining rates at the present levels, given the weakening growth and slowing inflation.

But, there is a risk of renewed pressure on the currency in an external context where risks related to the Fed and China’s growth stabilization continue to exist, while post-Trump victory these risks are expected to only increase. In the meanwhile, inflation has stayed on the central bank’s expected path so far in 2016. The BCCh, in its September monetary policy report, assumed that the annual CPI inflation might reach 3.5 percent by the end of this year and converge to the target faster than anticipated earlier.

But inflation has fallen surprisingly by about 0.5 percentage points that has increased certain near-term downside risks to the rate projection. The central bank is likely to recognize this downside risk during the November meeting, while keeping the rate on hold at 3.50 percent, added Societe Generale.