Chile’s central bank unlikely to tighten monetary policy

The Chilean central bank, BCCh, has undertaken a wait and watch stance in 2016 following its hawkish moves of the fourth quarter of 2015. During its June meeting, the BCCh had mentioned subdued aggregate demand in the economy, especially investment demand and projected that the economy might grow beyond its potential in 2016.

However, the central bank has lowered its 2016 growth projection in its latest Monetary Policy Report, because of weakness in mining sector and decline in investments.

The monetary policy stance is dominated by two factors- firstly, the rate normalization process of the US Fed, and secondly the sustainability of China’s economic recovery. These elements continue to augur risks and might set off new episodes of financial volatility, noted Societe Generale in a research report.

Moreover, the global growth outlook and the outlook of Chile’s trade partners have not rebounded significantly, implying that the external force to the Chilean economy might be weaker than before. Meanwhile, inflation in the nation has continued to be on the central bank’s projected path, even if it is higher than the target ceiling.

“We expect that the BCCh can tolerate inflation of around 4%, given the growth weakness. Moreover, we no longer expect a Fed rate hike in December, which should help the BCCh to continue with the current level of monetary accommodation. Consequently, we expect the BCCh to keep the rate unchanged at 3.5 percent at its July meeting," added Societe Generale.

The BCCh is unlikely to further tighten policy in the near future either. However, there is a risk on the upside to the rate projection if inflation accelerates or if the US Fed tightens rates more rapidly than anticipated.