The weaker-than-expected 0.1% q/q expansion in Chile in Q4 of last year confirms that high inflation and tight monetary policy are taking a heavy toll on the economy. We think the economy will contract by around 0.5% this year. The one crumb of comfort is that weakness in domestic demand is helping to reduce Chile’s current account deficit. But the external shortfall remains large, keeping Chile vulnerable if strains in the global banking sector cause capital inflows to dry up.
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