Chile’s central bank likely to keep policy rate unchanged

In the recent months, Chile’s central bank has taken on a wait-and-see stance after hiking rates in Q4 2015. The central bank’s tone was less dovish during its March meeting than it was in its previous meetings. The BCCh noted a less dynamic rebound on the domestic growth front in late 2015, along with weaker than forecasted growth in investment and private consumption.

Meanwhile, on the external front, the central bank mentioned various risks, such as uncertainty regarding China’s situation, the trajectory of Fed’s policy rate, scenario in neighbouring nations and doubtfulness regarding strength of US rebound. It concluded that the external stimulus that the country’s economy will receive will be lesser than projected earlier.

Subsequently, the central bank revised its 2016 growth forecast downwardly. Therefore, the expansionary monetary stance of main global central banks, the non-positive global outlook and below potential domestic growth is expected to influence the central bank’s near-term rate decisions, according to Societe Generale.

“We expect the BCCh to keep the policy rate unchanged at 3.5% at its April meeting. However, there is an upside risk to our near-term rate forecast if the growth situation does not deteriorate from here (the February economic activity data surprised us with an above consensus figure of 2.8% yoy), especially with the BCCh minutes suggesting that the tightening option remains on table”, added Societe Generale.

Meanwhile, the central bank in its March report projected that inflation will converge to its target rate faster than anticipated in its December report. The forecast is based on the assumption that the currency will not decline to the extent that it has in recent years, said Societe Generale. Moreover, inflationary pressures in the medium-term should decelerate because of the delicate economic scenario and recent moderation in wage.

Nonetheless, as inflation has remained high for a long time and still remains high, there is a possibility of a delay in reaching the target rate, noted Societe Generale. Moreover there are certain external risks, including the Fed hiking rates and subsequently pressurising the peso, suggesting certain continuous risks on the upside. Therefore, at this moment the near-to-medium-term inflation risk is unbiased, added Societe Generale.