Chile: Policy minutes reflect increasing concerns about inflation

Chile: Policy minutes reflect increasing concerns about inflation

Florencia Vazquez - Market Economics
Latam Macro Snapshot | 01 Feb 2013 14:34 |

The minutes of the January monetary policy meeting showed that the central bank is less concerned about (diminished) external downside risks to growth and increasingly worried about the implications for inflation of the persistently robust economic performance (which have not yet materialized).

We share these concerns and expect inflation to accelerate later this year. In response, the central bank will likely start a gradual tightening cycle in H2 2013. Near term, BCCh continued to sound comfortable being on hold.

In line with recent trends, the only option considered in the January meeting was to keep the policy rate unchanged at 5.0%. Indeed, the board considered that no material changes in the external and domestic scenarios had taken place since the last monetary policy report (IPoM) was published in December. Also, the central bank continued to underscore that the policy rate stands at neutral levels.

Regarding domestic performance, the monetary authority highlighted that while the response from inflation to dynamic growth has been muted so far, it could start to be seen with a lag. The central bank added that recent CLP strength could have also moderated price pressures. Productivity may have also played a role in moderating inflation, even though more evidence was probably needed to confirm this hypothesis. Concerns about the elevated pace of wages despite low inflation rates were also mentioned.

BCCh also continued to highlight risks associated to the widening current account deficit amid a context of strong domestic demand growth. That being said, the monetary authority also said that this challenge probably needs to be addressed through a coordination of various economic and financial policies.

Interestingly, several board members highlighted that expansionary monetary policy abroad intensified pressures on the Chilean economy (where interest rates were visibly higher). One board member said that this scenario translated into CLP appreciation pressure. While the interest rate differential may be considered as an argument against a tightening in monetary policy (given concerns expressed about CLP strength), we think that faced with an inflation problem BCCh will not hesitate to act.