Itaú BBA - The first reform

Scenario Review - Chile

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The first reform

September 5, 2018

The proposed tax reform will face a tough passage in congress

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

President Piñera has presented a bill to modernize the tax law and boost investment. Without a majority in Congress, the bill is likely to be vigorously debated and modified before approval only sometime in early 2019. Preventing a decline in revenues is necessary, given the recent deterioration of Chile’s fiscal metrics and subsequent sovereign rating downgrades.

Activity surprised to the upside in 1H18, but risks stemming from trade tensions remain. We see growth in Chile increasing to 3.8% this year (versus 1.5% last year) and to 3.5% in 2019.

In the 3Q18 Inflation Report, the central bank reiterated the start of the tightening is near as the output gap is seen closed. We feel there is space for a gradual and cautious cycle, especially considering the labor market remains loose, wage disinflation continues, and inflation pressures are under control, hinting that the output gap may not be as narrow as viewed by the central bank. We expect the tightening cycle to start near the end of the year (a 25-bp rate hike), with four gradual hikes throughout next year, taking the policy rate to 3.75%.
 

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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