BCCh rate hike imminent, but may be postponed to later this year

Chilean policy makers are stuck between the rock and the hard place. The latest data batch shows significantly weaker than expected industrial production but alsostubbornly high inflation. In August, manufacturing production dropped to -1.4% y/y against +0.5% y/y for consensus and industrial production dropped to -5.2% y/y against -0.5% y/y for expectations. 

Inflation reached 5% y/y in August against 4.8% for expectations. Core inflation was higher than expected, hinting that persistent headline inflation may have contaminated core inflation. BCCh has come across more hawkish in its last policy meeting. 

The reference rate is just 3%, which is well below headline inflation for well over a year now. The policy accommodation may have failed to compensate for weak demand out of China for Chilean copper. Copper has reached new lows in September. 

Nevertheless, by now pass-through from a weak peso and low interest rates may have contributed to higher headline inflation rather than to higher domestic demand. Moreover, the decision to skip a lift-off in the US in September could keep Chilean monetary policy decision makers from hiking the key reference rate on October 15.

"BCCh hike is imminent but the decision may be postponed to later this year. This should potentially upset the market, keeping the peso near 700 and higher for a while longer. The 1y swap rate has increased to 3.8% from 3.1% two months ago as the market priced in expected hikes", says RBC capital markets.