Itaú BBA - Postponing normalization

Scenario Review - Chile

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Postponing normalization

April 11, 2019

International and domestic factors provide room to retain monetary stimulus for longer

For the full version with all charts and tables, please open the attached pdf file

• Activity grew 4% in 2018, in line with expectations, led by mining investment. Despite weak activity expected for 1Q19, growth for the year is likely to be near potential levels, at 3.2%. Our scenario for copper prices is still consistent with robust investment (although delays in the approval of tax reform pose some risk for capital spending), while low inflation and the retention of monetary stimulus would favor the consumption environment.

• A sharp widening in the current account deficit was registered last year, but the fact that import growth is associated with stronger investment in the tradable sector reduces risk for the exchange rate. We expect the current account deficit to remain wide this year, at 3% of GDP (2.7% in our previous scenario; 3.1% in 2018). 

• Despite the wide levels of the external deficit, our models (which take into account copper prices, DXY and interest rate differentials, among other factors) suggest room for some appreciation of the Chilean peso. However, we now see the CLP at 655/USD by the end of this year (from 645 in our previous scenario). 

• The central bank’s view is that risks are tilted to the downside for the external scenario and the slower inflation convergence path provides room to retain monetary stimulus for longer. We still expect only one further 25-bp rate hike near the end of this year, taking the policy rate to 3.25%. However, one less hike is now expected for next year (with the base rate expected to end the year at 3.75% versus 4.0% previously).

João Pedro Bumachar
Vittorio Peretti
Miguel Ricaurte


For the full version with all charts and tables, please open the attached pdf file

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