Chile's inflation unlikely to return to target in 2016

A fresh round of substantial Chile's peso depreciation halted inflation's brief phase of moderation and it is now rising once again. We expect the pace to stay  unchanged in September at 5.0% yoy (actually a rise from 4.99% to 5.05% yoy) even though core inflation probably fell slightly to 5.62% yoy after touching the 15 February high of 5.67% yoy in August. 

Moreover, given the prospect of further pressure on the currency, inflation could stay near 5.0% this year and then by moderate, albeit less than previously expected, in 2016 (our previous view was for inflation heading towards the BCCH's target by Q4 15). 

The labour market has been tighter than expected, despite below-trend growth for some time now. Therefore, inflation forecasts for the Chile economy is revised to 4.4% and 3.6% for 2015 and 2016 from 3.8% and 3.1%, says Societe Generale. 

Given the significant pass-through from currency depreciation and the stronger-than-expected labour market, the central bank probably does not see inflation moderating to its target during the policy horizon despite significantly weaker economic growth. The downside risks to their inflation forecasts relate to additional growth weakness leading to a deterioration in the labour market and wages, argues SocGen.