Chile – Tempering rate expectations

Chile's recovery has been underwhelming this year yet we continue to see signs of stronger momentum through the rest of the year. Business surveys show an even brighter outlook. Numbers from the March Indicador Mensual de Confianza Emprearial (IMCE) report show that business sentiment was up 11.6% in Q1-2015, with some sectors such as mining (+20.3% in the same period) and construction (+16.5%) looking a lot more optimistic. 

Banco Central de Chile (BBCh) has maintained a relatively neutral policy bias despite a disappointing run of Q1 data. Like in Colombia, the inflation overshooting has effectively taken additional policy easing off the table. 

Recent inflation prints remain above the central bank's 4% target ceiling but have moderated. However, core inflation measures have been 'stickier', suggesting the next policy move is still more likely to be a hike than a cut. 

Indeed, central bank governor Vergara has remarked that policy normalisation towards year-end seems appropriate; however, 'neutral rates' are likely to take some time to achieve. 

"We interpret this to mean that a modest tightening cycle is most likely for Chile, starting with a 25bps hike in Q4-2015 and another 75bps in H1-2016; we previously expected 75bps in cumulative hikes by end-2015. We now forecast Chile's policy rate at 3.25% in Q4-2015, 3.50% in Q1-2016 and 4% in Q2-2016", says Standard Chartered.