The Chilean central bank has undertaken a wait-and-see stance in 2016 after its hawkish moves of the fourth quarter of last year. The BCCh, for the last few meetings has been considering the option of a rate cut. During its last meeting minutes, the central bank noted that even if inflation surprisingly decelerated in recent months, this had more to do with exchange rate movements rather than downward pressures on the activity side. Thus, it should not cause any change in its medium-term inflation outlook, said Societe Generale in a research report.

The Chilean economy shrank in October for the first time in seven years, as mining and manufacturing activity dropped. The global growth outlook and the outlook for Chile’s trading partners has not rebounded much, implying that external support for Chile’s economy might also stay weak. In the meantime, inflation has decelerated below the target of 3 percent and is likely to remain below target next year, stated Societe Generale.

This growth-inflation scenario is likely to make the way for rate cuts soon. But there is a risk of renewed pressure on the Chilean currency in an external context where risks related to the Fed and China’s growth stabilization continues to exist, and these risks have just risen since Donald Trump won the U.S. Presidential election.

Tomorrow’s meeting is the first meeting under the guidance of new Governor Mario Marcel. Given the dovish stance he has, the BCCh is expected to start lowering rates as soon as early in 2017, according to Societe Generale.

“For this month’s meeting, we expect the BCCh to remain on hold at 3.50 percent (given that the Fed is also likely to hike this month), but to introduce dovish language signalling the start of a rate-cutting cycle early next year”, added Societe Generale.