At its last meeting, the BCCH began its tightening cycle after 18 months of holding the rate steady. Initially, the board suggested December as the starting point, but stronger data in economic activity, as well as a desire for a controlled unwinding of monetary stimulus, prompted the board to start the tightening cycle in October.
After the decision, economic activity surprised to the upside and inflation stabilized close to target. Moreover, Chile’s statistical agency (INE) revised wage data upwards, finding that real wage growth, rather than being negative, had actually risen more than 1.5% in each of the last 12 months. Indeed, as we expected, wages started to accelerate in September due to the minimum wage increase. This means that the main reason for delaying rate hikes has faded.
In this context, we believe the BCCH has sufficient reasons to stick to its plan to bring monetary policy to a neutral stance by 2020. The Bank has made its preference for a gradual pace clear, and we expect a pause in the coming meeting. We expect a 25-bp hike in January 2019, with the BCCH likely to give clear reasoning when its quarterly monetary policy report, IPOM, is released on December 5.