Country Economic Forecasts > Chile

The Chilean economy contracted by 0.4% q/q in Q2. On a year-on-year basis, growth slipped to 1.3%. In Q2 activity was boosted by a significant rise in government consumption, while investment and consumer spending both contracted (albeit this did follow a surprisingly strong performance in Q1). Consumer spending was dampened by low levels of confidence, rising unemployment and weak payroll growth, while low copper prices and business sentiment continued to depress investment. From a supply-side perspective, services remained the key driver of growth, while the mining sector continued to drag overall activity down. We expect that the Chilean economy will grow by 1.7% this year.The annual CPI inflation rate re-entered the central bank's target range for the first time this year, falling to 4.0% in July. Moreover, services inflation the segment which remained stubbornly high during early 2016 is now falling. This development is consistent with the ongoing deterioration in the labour market and a negative output gap. We continue to expect that inflation will be down to 3.6% by the end of the year.Given the subdued growth outlook and well-anchored inflation expectations, we maintain our view that the central bank will keep interest rates at their current level of 3.5% until 2018.