The president of the central bank of Chile (BCCh), Jose De Gregorio, said on August 24 that inflation in Chile is likely to increase above the 3% target in the second half of 2010, while economic activity has recovered faster than expected thanks to positive dynamics in investment and consumption. Hence, according to him, the success of inflation targeting requires the withdrawal of excessive monetary stimulus, consistent with the hiking of the monetary policy rate. Meanwhile, there is high uncertainty about global economic recovery. Financial markets have somewhat stabilized, although tension remains elevated. The divergence in the recovery between advanced economies and emerging markets has translated into capital flows to emerging markets, accompanied by the weakening U.S. dollar and gains in emerging stock markets.
De Gregorio said that although the Chilean peso has appreciated significantly in nominal terms, the long term real exchange rate is still in line with fundamentals, and shows a more stable pattern than other currencies.
Editor’s Note: This post is excerpted from a much longer analysis available exclusively to RGE Clients, LatAm Focus: Brazil’s Spending Remains High Before Election
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