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Executive Summary:
- The Chilean Central Bank are widely expected to hike the key interest rate by 50bps to 1.25%, but some analysts see a risk of a hike of as much as 75bps.
- Inflationary pressures, an uncertain political backdrop and a weakening Peso may contribute to a more hawkish tone.
- Another accelerated round of pension withdrawals would add to the argument for expedited policy normalization
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Inflation pierces top end of target range
Sustained pressure on headline CPI inflation has seen the rate pierce the top end of the bank's tolerance band, showing above 4% for the first time since 2016. Annual CPI touched 4.5% in July, well above the expected 4.1% and 3.8% prior reading in June.
Continued optimism surrounding the growth outlook
Second quarter GDP confirmed market optimism surrounding the economic recovery, printing 1.0% Q/q and 18.1% Y/Y, both ahead of estimates. The release prompted a number of analysts – both local and foreign – to boost their near-term growth forecasts for Chile. Consensus for growth into year-end is now around 10%, 1.5ppts above the earlier forecasts. Output was boosted by a surge in consumption, driven by booming fiscal stimulus (the IMF estimate Chile's fiscal response to have more than offset the economic impact of COVID) and a further drawdown of pension savings, estimated to amount to close to $50bln.
Cerda warns of negative impact from further pension withdrawals
Finance Minister Rodrigo Cerda commented that a new round of early pension fund withdrawals would create risks to the financial system and hurt future retirement pay-outs. The central bank themselves have issued similar warnings, and an accelerated pace of withdrawals could add to the argument for more expedited policy normalization. This may garner greater market focus going forward. The finance minister did add, however, that Chile's inflation jump is transitory with consumer prices having been driven by factors such as supply shocks, transportation, and food.
Why MNI
MNI is the leading provider
of intelligence and analysis on the Global Fixed Income, Foreign Exchange and Energy markets. We use an innovative combination of real-time analysis, deep fundamental research and journalism to provide unique and actionable insights for traders and investors. Our "All signal, no noise" approach drives an intelligence service that is succinct and timely, which is highly regarded by our time constrained client base.Our Head Office is in London with offices in Chicago, Washington and Beijing, as well as an on the ground presence in other major financial centres across the world.