CLP depreciation linked to narrowing interest rate differentials and greater global risk aversion. Lower appetite for risk since the July meeting has been driven by several events, such as the US sovereign debt downgrade, uncertainty related to China and the pace of global disinflation.
The central bank’s board unanimously lowered the policy rate by 75bps to 9.5%, slowing the pace after the 100bps cut that began the easing cycle in July. While the 75bp cut was in line with our call and the Bloomberg median, market expectations were divided with a significant share of surveyed analysts expecting the BCCh to cut another 100bp (9 of the 22 estimates registered in Bloomberg). In the aftermath of the larger than expected 100bps cut that began the cycle, we also had leaned towards a 100bp cut, but updated BCCh guidance, the weakening of the CLP, and a recent uptick in one-year market implied inflation expectations swayed us towards moderating the pace. With today's decision, the ex-ante one-year real rate falls to 6% reflecting a less contractive monetary policy stance (7.75% cycle peak in July prior to the cutting cycle). In any case, monetary policy continues to be very contractive considering that at 6% it is still well above the central bank’s real neutral range estimate of 0.5%-1.0%. The communiqué reaffirms the expectation of a yearend rate outlined in the previous decision (7.75-8.0%), implying rate cuts of a similar magnitude in October and December.
Activity and inflation are broadly unfolding in line with the central bank’s scenario. Activity fell sequentially in 2Q, with private consumption stabilizing and investment dynamics remaining weak. A strong activity start to the 3Q was driven by transitory factors. Weaker employment growth and recovering labor force participation has led to an unemployment increase, but real wage growth continues to recover and private sentiment is gradually improving. The disinflation process continues, with the drop from earlier peaks explained by the reduction in core goods inflation and the volatile component. Services inflation has shown more stickiness. Medium-term inflation expectations remain anchored at the 3% target.
While the disinflation process may slow, given several supply-side shocks, inflation is still set to converge to the 3% target within the two-year timeframe, supporting a further reduction in the restrictiveness of monetary policy. We are penciling in cuts of 75bps for the remaining meetings of the year (to 8%) and to gradually near neutral rate by the end of 2024. The central bank will publish the September Monetary Policy Report tomorrow at 9am, in which the projections for growth, inflation, and other relevant macroeconomic variables, and the rate corridor will be updated. We expect the corridor’s baseline scenario to signal 7.75% - 8% by yearend. The next rate decision will take place on October 26.