Chile: Inflation plummets below the Bank's tolerance range in June, raises possibility of further monetary easing
July 7, 2017
Consumer prices in Chile dipped 0.4% in June compared to the prior month, contrasting May’s 0.1% rise and coming in substantially below analysts’ expectations. According to the National Statistical Institute (INE), June’s fall was underpinned by lower prices for food and non-alcoholic drinks, clothing and footwear and recreation and culture.
Inflation was 1.7% in June, down sharply from May’s 2.6% and marking the slowest rate in several years. Inflation had been gradually drifting down over the last year due to limited demand-push pressures and a stable currency, although June’s result drags the figure below the Central Bank’s 2.0%-4.0% tolerance range. This likely increases the possibility of monetary easing going forward in order to ensure expectations don’t become de-anchored; the Central Bank left the door to further rate cuts open at its most recent meeting. Markets reacted swiftly to this potential scenario, with the peso losing value against the dollar shortly after the announcement.
After stripping out volatile categories such as oil, fresh fruit and vegetables, core consumer price pressures also continued to ease. Core prices fell 0.2% in June, contrasting May’s 0.2% rise, while core inflation was 2.0% in June, down from 2.5% in May.
On the prospect of further monetary easing, Alejandro Fernández Beroš, Chief Economist at Gemines S.A, said: “My impression is that we are going to have an additional monetary relaxation, but more than by the low inflation, by the weakness in the economic activity data. Notwithstanding the above, a scenario of lower inflation and below the tolerance range, facilitates the possibility of a reduction in the MPR in the coming months (not before September, in any case), but the key element behind the decisions of the Central Bank is, at this moment, activity and not inflation”.
Author: Oliver Reynolds, Economist