BCRA Governor suggested the revised inflation targets leave room for lower rates; thus a rate cut seems very likely.
The central bank will announce the monetary policy rate today. The central bank left the monetary policy rate unchanged at 28.75% in December. Surprisingly, two days after the second December monetary policy meeting, the government announced together with Central Bank’s Governor higher inflation targets for 2018 (15% without tolerance range vs. 10±2%, previously) and 2019 (10% without tolerance range vs. 5±1.5%). In the press conference announcing the target changes, Governor Sturzenegger suggested the new targets leave room for lower interest rates. Consequently, a rate cut seems very likely. We expect a 150-bp rate reduction to 27.25%. However, we note that it will be difficult to ease monetary policy afterwards as data on inflation and inflation expectations will likely be unfavorable, amid the key wage bargaining season.
For the second consecutive month, inflation failed to meaningfully surprise the market and ended the year broadly consistent with the central bank’s baseline scenario. Consumer prices gained 0.15% from November to December, broadly in line with the Bloomberg market consensus and our 0.2% call. As a result, annual inflation ticked up from 1.9% in November to 2.3% (2.7% in 2016), aided by a low base of comparison. Non-tradable inflation continues to moderate and is now at the 3.0% target (3.1% in December and 4.0% in 2016). Meanwhile, for the third consecutive month, tradable inflation is less of a drag at 1.9% (1.0% in November), but is in line with the 2016 recording. Core inflation (excluding food and energy prices) remains broadly stable and at low levels (1.9%). Our expectation is that core inflation will stay near the lower bound of the 2-4% target range throughout 2018.
The recent strengthening of the Chilean Peso and an only gradual recovery of activity mean inflation will likely remain subdued most of the year. After hovering below 2% for most of 1H18, we see inflation ending the year within the target range, close to 2.5%. In this context of low inflation, we anticipate the central bank will remain vigilant of the recent strengthening of the CLP and how that filters into headline inflation. As some measures of inflation expectations have persistently hovered below the 3% target, further signs of de-anchoring could lead to additional easing. ** Full story here.
In December, the trade balance recorded a USD 1.1 billion surplus, in line with our forecast, while above the Bloomberg market expectation of USD 875 million. So in 2017, Chile recorded a USD 6.9 billion trade surplus (USD 5.3 billion in 2016), the highest annual trade surplus since 2011 (USD 10.8 billion). Our seasonally adjusted series shows that, at the margin, the trade balance surplus dipped to USD 9.6 billion (annualized) in the final quarter of the year (USD 12.8 billion in 3Q17), partly due to a widening of the energy deficit.
Annual mining exports growth remains robust while it has moderated at the margin as output consolidates. Agriculture exports in 4Q17 dropped 24.5% year over year, down from +17.9% in 3Q17, while mining exports stayed elevated at 26.7% (26.6% in 3Q17). Industrial exports grew 6.8% in the quarter (10.4% in 3Q17). At the margin, exports growth decelerated to 3.4% qoq/saar, from 55.6% in 3Q17 as mining export growth normalizes following the recovery from the 1H17 production strike. In all, the latest trade figures highlight Chile’s limited external vulnerabilities. With copper prices set to remain elevated for most of 2018, we expect the current account deficit to stay at low levels, close to the 1.5% estimated for 2017.
** Full story here.
According to the central bank’s Focus survey, IPCA inflation expectations remained virtually flat at 2.79% (+1bp) for 2017 and at 3.95% (-1bp) for 2018. Meanwhile, the median of inflation projections for 2019 remained at 4.25%. Year-end Selic expectations remained unchanged at 6.75% for 2018 and declined to 8.13% (from 8.25%) for 2019. GDP growth projections also barely changed: median growth expectations for 2017 increased 1bp to 1.01% and for 2018 declined 1bp to 2.69%, while it remained at 2.8% for 2019.
November’s retail sales will come through today at 9:00 AM (SP time). We expect a 0.7% mom/sa (consensus: 0.2%) increase in core retail sales and a 2.3% (consensus: 0.3%) growth in the broad segment (which includes vehicle sales and construction material), driven by the “Black Friday” sales.
The statistics institute (INEGI) will announce December’s CPI today at noon (SP time). We expect a 0.55% month-over-month variation (mkt: 0.57%), driven by non-core food, energy prices (LPG and gasoline), and air transport fares (pressured by the seasonality of end-of-year holidays, higher fuel prices, and a weaker Peso). The 10% minimum wage hike, which entered into force in December, could also exert upward pressure.