Chile:CPI surprise unlikely to change BCCh’s stance
Consumer price inflation surprised to the downside in Chile during the month of June. The CPIindex declined 0.4% m/m in the month, a reading that stood below our forecast and theconsensus expectation (0.1% and 0% m/m, respectively). The year-on-year inflation ratesurprisingly declined to 1.7%, slightly below the floor of BCCh’s 2-4% tolerance range (Chart 1).
While seven out of twelve components declined last month, only two (leisure and culture, andfood and non-alcoholic beverages) explain 0.3pp of last month’s 0.4pp slide. Leisure priceswere depressed by a 15% m/m slide in tourism prices and a 10% m/m decline in plane tickets.
The food component declined, driven by volatile fruit and vegetable prices. Other foodcomponents actually increased 0.8% m/m in June.
While these declines are unlikely to repeat themselves in coming months, the year-on-year rateis apt to remain depressed near term. Some modest acceleration is likely towards the end of theyear, but inflation will probably stand below the 3% target in 2017. Given the downside surprise,we now expect consumer prices to advance 2.5% Dec/Dec this year (down from our previous2.8% forecast). The average increase will probably stand slightly lower at 2.4% y/y.
We do not see the central bank changing its base-case scenario materially, due to a single,downside CPI surprise that was mostly explained by only two CPI components. Thus, weexpect BCCh to stay on hold at the monetary policy meeting next week, in line with themessage sent in the last Monetary Policy Report and the minutes of the June monetary policymeeting. Both suggested that following 100bp of easing this year so far, the current level ofmonetary stimulus was considered adequate by the monetary authority.
The central bank will probably monitor the evolution of inflation expectations closely. So far,inflation expectations (at the 24-month policy horizon) have remained firmly anchored at the 3%target. BCCh enjoys strong credibility, and 1y/1y inflation expectations seldom deviate from thetarget (Chart 2). A persistent deviation could prompt the central bank to change its neutralstance to a dovish one and increase the probability of additional rate cuts. We currently call forthe policy rate to remain unchanged at 2.5% this year.