Chile: The central bank is expected to remain on hold this week

Florencia Vazquez,Gustavo Arruda,Marcelo Carvalho,Nader Nazmi - Market Economics
Daily Latam Spotlight | 10 Dec 2012 06:00 |

Chile: The central bank is expected to remain on hold this week.

CHILE

The central bank is expected to remain on hold this week. BCCh will have its monthly monetary policy meeting on Thursday. We expect no changes, in line with trends throughout most of the year. The consensus agrees with this view.

In the statement that was released after the November meeting, the central bank kept the neutral bias unchanged. This signals no changes in the policy rate near term, in line with our long-standing forecast. It will be interesting to read BCCh’s characterization of the recent moderation in growth (in sequential terms). Note that the monetary authority highlighted recent risks for the medium-term inflation outlook stemming from steady, above-potential growth performance.

Surveys of economic expectations will also attract attention this week. The central bank will unveil the monthly survey of economists and bi-monthly survey of financial market participants on Tuesday and Wednesday, respectively. Attention will be focused on the evolution of inflation and rate expectations.

Unexpectedly large CPI decline in November. Headline consumer prices were reported to have declined 0.5% m/m in November. While expectations, in general, were looking for a negative reading, the actual slide was larger than forecast. Our estimate was slightly negative, and the median estimate from the Bloomberg survey anticipated an unchanged CPI reading in November.

As a result of last month’s decline, the y/y headline inflation rate moderated to 2.1%, a pace very close to the lower bound of BCCh’s 2-4% tolerance range. Core inflation (-0.2% m/m) also moderated to 1.7% y/y. The more restrictive measure of core prices (IPCX1) was unchanged in November; the y/y pace inched up to 2.1%.

November’s reading was depressed by specific factors (see details below). Indeed, note that in sequential (sa) terms, both headline and core CPI pressures continued to accelerate. Still, slower growth in recent months will probably help to moderate the central bank’s concerns about the inflation outlook near term. Note that BCCh had recently highlighted the potentially adverse, medium-term impact on inflation of steadily above-potential growth.

The upcoming IPoM (to be unveiled on 18 December) will likely provide valuable information on official views on growth and inflation. Beyond the recent moderation, we still think inflation is likely to accelerate next year as growth returns to an above-potential pace. This is likely to trigger a gradual tightening cycle in 2013. We expect the policy rate to remain unchanged near term.

Details:

- Below the headline, 5 of the 12 main components declined last month. The largest negative contributions came from transport and food prices which slid 1.6% and 0.7% m/m and subtracted 0.32 and 0.15pp, respectively, from the headline reading. Our forecast included a similar slide in food prices, but did not price in such a large decline in transport prices. The latter, as expected, were pushed lower by a 6.3% m/m slide in gasoline prices (we expected a 4% monthly decline). But there were also declines in long-distance bus prices.

- Food price deflation was mainly driven by a 4.6% m/m decline in vegetable prices. The contribution from other food prices was also modestly negative. In contrast, fruit prices jumped 5.2% m/m.

- Housing prices also helped to explain the difference between our forecast and the actual reading. While we had expected a modest advance, housing prices were unchanged last month. Electricity prices declined a sharp 7.2% m/m and offset other increases (such as those seen in natural gas prices).

- Among the components that advanced in November, restaurant and hotel prices rose 0.8% m/m. The combined contribution of the seven components that advanced was modest at 0.08pp.

- Tradable prices declined 0.9% m/m while non-tradable goods advanced 0.2% m/m. Their y/y paces stood at 0.4% (visibly lower) and 4.3% (stable), respectively.

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