Chile’s central bank is expected to continue with its stance of wait-and-see. The BCCh started this mode after its hawkish moves in the fourth quarter of 2015. During its April meeting, the central bank’s tone was less dovish than in its earlier meetings. The central bank had mentioned that the country’s economic activity in February exceeded expectations, while March’s data had also come in strong at 2.1% y/y growth.
Meanwhile, the central bank was slightly positive about China’s economy and the more wary stance of the US Fed. However, it stated that the global economic growth outlook continues to be weak, implying that the external boost the economy will get might be below expected. The Chilean central bank has downwardly revised the 2016 growth forecast in its Monetary Policy Report of March. Meanwhile, inflation has been on the central bank’s expected course. Therefore the Chilean central bank is likely to keep the policy rate on hold at 3.5% in May, said Societe Generale in a research report.
According to the central bank’s March Monetary Policy Report, inflation is likely to converge to its target in the December Report. This is assuming if the peso does not weaken to the degree it has depreciated in recent years. Moreover, medium-term inflationary pressures are expected to alleviate because of weak economic scenario and also the recent moderation of wage and the likely effect on services inflation. Inflation in Chile is in line with the central bank’s expected trajectory and came in at 4.2% y/y in April.
“However, given that inflation has stayed high for a long time, there is a risk of a delay in its convergence (due to index-related effects and their possible impact on the formation of expectations). For now, the near- to medium-term risk for inflation is biased to downside”, added Societe Generale.
