The Chilean central bank’s September policy meeting minutes show the Board also discussed a smaller 50-bp cut. In the September decision in which the BCCh cut rates by 75-bp to 9.5%, slowing the pace from the surprise 100-bp cut that began the easing cycle in July, the Board also discussed cutting by a smaller 50-bps, as well as a larger 100-bps, as these would be consistent with taking the year-end policy rate to 7.75-8%. The minutes show that, in the end, the Board unanimously agreed on a 75-bp cut as it was consistent with the IPoM's central scenario and was in line with the majority of market expectations. The latter appears to have played a relevant role in the decision considering the "high sensitivity" of policy rate expectations and the exchange rate with respect to interest rate differentials. The Board is likely to be more sensitive to asset prices (rates, FX) in the next decisions, also signaled by the fact that they also analyzed a below consensus 50-bp cut. As a result, the odds of a larger than 100-bp cut in the near term seem low.
The domestic economy has been gradually resolving the macro imbalances of previous quarters and inflation is falling, even somewhat faster than expected in the case of core CPI. However, the minutes show that the most important change since the June IPoM was in the balance of risks, with a significant decline in the likelihood of scenarios in which inflation deviated from the staff’s forecasts.
The minutes provide insight to the Board’s discussion on the drivers of recent FX and rate volatility. While a certain degree of volatility in FX and rates materialized after the beginning of different cycles (easing in 2013, tightening in 2021), volatility since beginning the easing cycle in late-July could be due to the BCCh being among the first to begin easing globally, uncertainty regarding the Fed, and the degree of inversion in the local yield curve. As such, the Board is likely to be more sensitive to asset prices (rates, FX) in the next decisions, also signaled by the fact that they also analyzed a below consensus 50-bp cut.
Regarding the options of cutting 50-bp or 100-bp, the Board signaled that there were no compelling arguments to give greater weight to one option over the other. While both options would have been coherent with the rate corridor from the IPoM, the 75-bp cut was consistent with the IPoM central scenario and market expectations.
Despite upside risks for the inflation path (stemming from supply shocks), inflation is still set to converge to the 3% target within a two-year timeframe, supporting a further easing of the restrictive monetary policy. In line with latest guidance, we expect cuts of 75 bps for the remaining meetings of the year, to 8%, and a gradual decline to a near-neutral 4.5% by late-2024. The next monetary policy meeting is on October 26.