Central Bank of Chile likely to keep rates unchanged on deteriorating growth outlook

Chile’s central bank, in recent months, had adopted a wait-and-see strategy after its hawkish moves in Q4 2015. However, the recent statements by BCCh have been dovish, reflecting deteriorating domestic and global growth outlook. Chile had posted sluggish growth report in Q4 2015. With the weak economic activity data released for January, GDP growth prospects for 2016 are likely to deteriorate significantly.

Moreover, the central bank noted lowered global growth outlook and the effect on central banks’ policies globally. Both of these factors are expected to influence the central bank’s near-term rate decisions. It seems increasingly difficult to think that the central bank will continue with tightening of monetary policy on back of the recent growth numbers. The BCCh is expected to keep its policy rate on hold in March.

Meanwhile, the central bank has also noted lower medium-term inflationary pressures coming from weaker economic scenario and moderate wages and its possible effect on services inflation. This indicates that future rise in rates will be limited.

“This has increased the downside risks to our rate forecast of two more rate hikes of 25bp each in this cycle through H1 16, followed by a pause”, says Societe Generale.

However, certain downside risks are expected to mitigate with the likelihood of additional tightening of monetary policy by the US Fed in 2016, the expected return of pressure on the currency, and the subsequent rise in inflationary expectations.