Disappointing growth and muted price pressures in Q2had kindled expectations of additionalmonetary easing by the central bank. The publication of the July monetary policy meetingminutes only added further fuel to the fire. Indeed, one board member had voted in favour of a25bp rate cut.    However, economic growth has picked up speed more recently (but, it remains below itspotential pace). We forecast real GDP growth to have accelerated to 1.5% y/y in Q2from avisibly lower 0.1% in Q1. For H22017, we expect growth performance to be significantly better:    the pace of real GDP will likely increase to 2.1% y/y from 0.8% in H1(Chart 1).    On the inflation front, after a deflation scare in June, July’s report contributed to a morebalanced view. While the year-on-year inflation rate remained below the floor of BCCh’s 2-4%tolerance range, the headline monthly print turned positive again. Moreover, at 0.4% m/m, coreinflation exceeded the headline reading in July, potentially hinting at more persistent pricepressures.    Importantly, non-tradable inflation reaccelerated to 3.4% y/y in July, a level not only within theofficial tolerance range, but also above BCCh’s 3% inflation target (Chart 2). The bulk of thedisinflation trend continues to be explained by the tradable component. We expect headlinemonthly CPI inflation to remain positive near term, even though the year-on-year pace shouldcontinue to hover around the 2% tolerance range floor.    Consensus expectations for additional easing were delayed, but not eliminated, by the growthimprovement and inflation acceleration. Indeed, according to the latest surveys of traders andeconomists, BCCh is still expected to cut the policy rate by 25bp, but a bit later than originallythought (economists now think a move in September is likely). Also, both surveys show that noother changes are expected after September or before BCCh embarks on a tightening cycle in2018.    In contrast, we expect the monetary authority to remain on hold for the rest of the year. Recentgrowth and inflation performance have reaffirmed our long-standing view. We agree withconsensus in thinking that policy tightening will probably be a story for 2018, when we expectgrowth to have improved and headline inflation to have returned to levels closer to BCCh’s 3%target. Thus, against this backdrop, we expect the central bank to remain on hold on Thursday.

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