Chile: BCCh stood on hold, as expected; neutral bias remained in place

Chile: BCCh stood on hold, as expected; neutral bias remained in place

Florencia Vazquez - Market Economics
Latam Macro Snapshot | 13 Nov 2012 22:00 |

Chile’s central bank kept the policy rate unchanged at 5.0% at today’s monetary policy meeting. The decision stood in line with both our forecast and the median estimate from the Bloomberg survey.

Importantly, the neutral bias was kept unchanged suggesting that no policy rate changes should be expected near term, in line with our long-held view. That being said, we continue to expect the central bank to embark on a gradual tightening cycle next year as growth momentum builds and price pressures accelerate. The December monetary policy report should bring more clarity in terms of the rate outlook in early 2013.

The most relevant change in the statement that was released after the policy meeting took place in the paragraph describing domestic activity conditions which showed a slightly more hawkish tone in November. Indeed, the monetary authority said explicitly that “economic activity and demand indicators have stood above expectations”. Last month, in contrast, the central bank had instead said that “domestic activity indicators had evolved in line with their trend-like pace” even though the “increased dynamism of private consumption” had also been underscored. Regarding labor market conditions, BCCh highlighted once again that they remain tight.

On inflation, BCCh characterized October’s elevated 0.6% m/m CPI reading as “driven by specific, one-off factors”, largely as expected. Indeed, we had already highlighted that last month’s consumer price inflation had been affected by a sharp increase in fresh food prices (up 9.3% m/m). In particular, the rise in potato prices added a whopping 0.2pp to October’s headline CPI reading. Separately, the central bank continued to express comfort by highlighting that headline inflation remains close to the 3% target and that underlying price pressures remain below that target. The fact that inflation expectations in two year’s time remain aligned with the target is also a source of comfort for the monetary authority.

On the external front, the tone was less upbeat this month. Indeed, BCCh highlighted that uncertainty about Europe’s fiscal and financial situation continues and that risks of an abrupt fiscal adjustment in the US still looms. Moreover, in the monetary authority’s opinion international financial conditions are currently a bit tighter compared to a month ago and tensions could intensify in coming months. On the bright side, Chile’s central bank currently sees increased positive signs on growth in emerging economies. Until last month, the monetary authority had expressed concerns about the ongoing deceleration underway in the emerging world.