Real GDP growth in Chile bottomed in the first half of 2017, andwill trend higher in the quarters ahead on strong private consumption,rising copper output and a steady inflow of investment. Thenon-copper sectors of the economy will likely become increasinglyimportant drivers of growth in the years ahead.
Chile's current account deficit will widen modestly in 2017 as a strikeat the Escondida copper mine will weigh on exports. In the yearsahead, a diversifying export base and strong copper productionwill support narrowing deficits, while capital inflows stabilise Chile'sbalance of payments position.
The Chilean peso will gradually appreciate in 2018, due to rising copperprices, subdued inflation and stronger economic growth relative tothe US. However, relatively low real interest rates in the country willlimit upside for the currency. In the long term, a diversifying exportbase will reduce the unit's close association with copper prices.
The Banco Central de Chile will enact one additional rate cut in 2017,reducing the benchmark policy rate by 25 basis points to 2.25%.
The bank will then enact 50 basis points of hikes in 2018, bringingthe rate to 2.75% as inflation and economic activity pick up.
A narrowing fiscal deficit will keep Chile highly creditworthy in thecoming years, as tax reforms and an uptick in activity help to supportrevenues, while a commitment to fiscal prudence limits spendinggrowth.