The Board of the central bank unanimously decided to hold the policy rate at 11.25%, and maintained a hawkish forward guidance that will likely lead market pricing to postpone the expectation of rate cuts (currently between May and June). The Board highlighted that the adjustment process of the economy is unfolding more slowly than expected, leading to rates remaining at current levels for longer than outlined in December (when the beginning of the easing cycle was signaled for 2Q23). With the decision, the one-year ex ante real rate remains at roughly 6.5%, significantly above the Central Bank’s neutral real rate estimate of 0.75%.
Until early March, the global activity outlook had improved along with a greater concern on inflation. Recent developments drove attention to the health of some banks in advanced economies. Overall, volatility and uncertainty about the future scenario remain high.
The domestic economic adjustment process has unfolded more slowly. Locally the financial market followed global trends with long-term interest rates falling. The Board highlights that the CLP has appreciated by around 11.5% compared to the December IPoM, partly due to the consolidation of lower domestic uncertainty. Revisions to National Accounts data showed a relevant change in the composition of domestic demand (for 2020-2022), with consumption higher and investment lower (likely resulting in net-adverse effect on inflation). Domestic savings were lower and the current account deficit was higher than expected. Data for the end of 2022 and the start of this year show that the economic adjustment process of the economy has been slower than expected (implying a slower closure of the positive output gap). Regarding credit, the latest Credit Survey for 1Q23 reports that both supply and demand remain restrictive.
Core inflationary pressures are elevated. While headline inflation has fallen, the Board highlights that core inflation has remained at similar levels for several months. In addition, core inflation has accumulated several significant upward surprises recently. While the analyst survey for March posted the return of the two-year inflation expectation to the 3% target, the Board chose to highlight that most of the inflation expectation measures for two years continue to be above the target. With the economy adjusting more gradually, the inflation fall is unfolding more slowly than expected (3.6% yearend expectation in the 4Q22 IPoM).
All in all, the Board maintained its guidance from previous meetings, deeming it necessary to maintain the policy rate at 11.25% until the adjustment of the economy is coherent with inflation converging to the target over the two-year horizon. The Board acknowledges that the central scenario of the 1Q23 IPoM (to be published tomorrow, April 5), considers this process will take longer than anticipated in December. We expect the 1Q IPoM to revise activity and inflation up for this year, with the monetary policy corridor signaling gradual cuts beginning by June at the earliest. The minutes of the meeting will be published on April 20. On the political front, the one-year hiatus for the full pension fund withdrawal discussion is met on April 18, suggesting political noise will be elevated as some congressmen prepare to present further withdrawals. The government is against new withdrawals, but low approval ratings, weakening economy and elevated inflation mean calls for greater stimulus will grow.
Andrés Pérez M.
Ignacio Martinez Labra