Economics

Chile normalization confident

Monetary policy | Chile

Central Bank Review No rate change, language maintained

16 April 2010 As expected, Chile’s Central Bank Monetary Policy Board kept the country’s benchmark
lending rate (MPR) at 0.5% at its meeting last night (April 15). This is in line with our note of
Cristian Gardeweg April 8, when we said the market was pricing this scenario, and underscored by the Bank’s
cgo@celfin.com quarterly Monetary Policy Report (IPOM) issued April 6.
+562 490 5438
! We maintain our view that the Bank will begin increasing rates in the middle of this year;
Cesar Perez-Novoa
and we expect rates to end at 2.5% by the end of the year.
ar.
cp@celfin.com
+562 490 5012
Chile: Headline and core inflation, and monetary policy (%)
10.0
MPR (%)
Headline CPI (%, LTM)
7.5 Core CPI (%, LTM)

5.0

2.5

0.0

(2.5)
Apr-04 Oct-05 Apr-07 Oct-08 Apr-10

Sources: Chilean Central Bank, INE, Celfin Capital.

Aim is still 3% projected inflation

The Board’s Communiqué, reviewing the macro situation, reports its view that (i)
internationally, volatility in financial markets has tended to decline, despite turbulence in some
European economies, noting that prices of copper and oil have remained high, and inferring
that prospects for recovery of global output this year are still favorable. (ii) Domestically, it
continues, the information available is basically the same as in the Bank’s just-published
Monetary Policy Report. It says the March CPI being lower than the market expected is seen
by private-sector analysts as a temporary phenomenon, and that over the longer term the
situation is likely to be consistent with the baseline scenario in the Report. It also says it
expects gleaning of accurate short-term statistics to continue to be problematic due to the
disruptions cause by the earthquake (of February 27).

Finally, saying that the Board believes current conditions, and private expectations (charts,
below) continue to be consistent with the normalization described in the Monetary Policy
Report, the Communiqué reiterates that the Bank will continue to use its policies with
flexibility, based on its central aim that projected inflation should converge to 3% over its
policy horizon.

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Economics | Monetary Policy
16 Ma rch 2010

Chile: Domestic economic expectations

Consumer prices (%, year-end 2010) Monetary policy rate (%, year-end 2010)

3.8 4.6

3.1 3.1

2.4 1.6
Feb-09 Sep-09 Apr-10 Feb-09 Sep-09 Apr-10

Sources: Central Bank, Celfin Capital. Sources: Central Bank, Celfin Capital.

GDP (YoY change, %, year-end 2010) Chilean peso (ChP:US$, 11 months forward)

5.0 660

3.9
585

2.8
Feb-09 Sep-09 Apr-10
510
Feb-09 Sep-09 Apr-10

Sources: Central Bank, Celfin Capital. Sources: Central Bank, Celfin Capital.

5-year BCU (11 months forward), % 5-year BCP (11 months forward), %

3.2 6.2

2.6 5.2

1.9 4.2
Feb-09 Sep-09 Apr-10 Feb-09 Sep-09 Apr-10

Sources: Central Bank, Celfin Capital. Source: Central Bank, Celfin Capital.

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Economics | Monetary Policy
16 March 2010

Macroeconomic projections
Forecast summary
Period 2007A 2008A 2009A 2010E 2011E
National accounts
Real GDP (%) 4.6 3.7 (1.5) 4.5 4.6
Total demand (%) 7.6 7.6 (5.9) 7.2 5.7
Private consumption (%) 7.0 4.6 0.9 4.0 5.5
Investment (%) 9.2 18.7 (26.1) 19.8 4.6
Gross fixed capital formation (%) 11.2 18.6 (15.3) 3.5 6.0
Government spending (%) 7.1 0.5 6.8 3.0 3.0
Exports (%, local currency) 7.6 3.1 (5.6) 3.3 3.5
Imports (%, local currency) 14.5 12.2 (14.3) 9.8 6.2
Nominal GDP (US$bn) 164 171 164 180 205
GDP per capita (US$) 10,312 10,607 10,054 10,953 12,310
Population (mn) 15.9 16.1 16.3 16.4 16.6
Labor market
Employment (% YoY, average) 2.8 3.0 (0.7) 1.7 2.5
Unemployment (%, average) 7.1 7.8 9.7 9.8 9.5
Nominal wages (% YoY, average) 7.3 8.5 6.4 5.0 5.6
Payroll (% YoY, average nominal) 10.4 11.7 5.6 6.8 8.2
Balance of payments
Trade balance (US$bn) 23.9 8.8 14.0 17.0 18.7
Merchandise exports (US$bn) 68.0 66.5 53.7 66.0 71.9
Merchandise imports (US$bn) 44.0 57.6 39.8 48.9 53.2
Current account (US$bn) 7.5 (2.5) 4.2 2.6 2.3
Current account (% of GDP) 4.5 (1.5) 2.6 1.5 1.1
Net foreign direct investment (US$bn) 10.0 7.2 4.7 4.0 4.0
Prices, interest and exchange rates
Consumer prices growth (%, ye) 7.8 7.1 (1.4) 3.0 3.1
Consumer prices growth (%, average) 4.4 8.7 1.5 0.7 2.7
Wholesale prices growth (%, ye) 14.0 22.7 (14.9) 3.6 3.7
US$ exchange rate (ChP:US$, ye) 497 629 506 510 490
US$ exchange rate (ChP:US$ average) 522 522 560 510 490
Central bank rate (MPR) (%, ye) 6.0 8.3 0.5 2.5 5.5
M1 growth (%) 18.1 6.7 23.4 19.3 18.1
Fiscal indicators
Fiscal balance (% of GDP) 7.9 4.5 (5.1) (0.5) 1.3
Fiscal spending (% YoY) 8.7 8.0 17.6 5.2 3.5
Fiscal spending (% of GDP) 18.6 21.0 24.4 25.5 24.8
Gross total government debt (US$bn) 7.1 7.3 9.6 13.8 15.2
Foreign debt and reserves
Total external debt (US$bn) 55.7 64.8 74.1 66.3 67.3
Short-term (<12 months) (US$bn) 11.1 14.9 17.5 15.3 15.5
Long-term (>12 months) (US$bn) 44.6 49.9 56.6 51.0 51.8
Total external debt (% of GDP) 33.9 37.9 45.3 36.8 32.9
International reserves (US$bn) 16.9 23.2 25.4 22.6 22.6
Commodities
WTI (US$/bbl, average) 72 104 61 81 85
Copper (US$/lb, average) 3.23 3.16 2.34 3.20 3.50
Currencies
Euro (US$:Euro, average) 1.37 1.47 1.39 1.48 1.58
Yen (Yen:US$, average) 118 104 94 89 83

Sources: Central Bank, INE, Dipres, IMF, Celfin Capital.

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