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Global developments opened the door for a step up in pace of rate cuts
2023/12/19 | Andrés Pérez M., Vittorio Peretti & Ignacio Martinez Labra



The BCCh’s Board unanimously voted to cut the monetary policy rate by 75bps, up from the 50bps in October, taking the policy rate to 8.25%. While the market was highly divided between a 50bp and a 75bp cut, the decision was in line with our call, the Bloomberg market consensus and asset prices. Surveys, prior to the Fed’s decision, showed a preference to continue with 50bps. Since starting the easing cycle in July, the BCCh has cut by a total of 300bps in four meetings. Inflation has fallen from a 14.1% peak in August 2022 to 4.8% in November 2023, gradually inching closer to the BCCh’s 3% target. Medium-term survey-based inflation expectations have been anchored for several months. The ex-ante one-year real rate now sits at 5.15% (still well above the 1% ceiling of the BCCh’s neutral range; down from 5.6% in October). The central bank’s statement signals rate cuts will continue with the size being data-dependent. 

 

The macroeconomic scenario has evolved in line with expectations. The economy has been resolving its imbalances from previous quarters and inflation continues to fall. Private consumption has improved, investment remains weak. Job creation is low, with labor demand still weak, consistent with the evolution of the economic cycle. The November inflation surprise was mainly due to volatile items. Inflation is still expected to converge to the 3% target during the second half of 2024, but core CPI is now seen reaching 3% during 1S24 (before in early 2025) following an accumulation of downside surprises since the September IPoM. 

 

Global developments opened the door for a step up in pace of rate cuts. Global inflation has continued to decline and the outlook for monetary policy has turned more dovish, particularly in the US. The episodes of tension in the global and local financial markets, recorded at the time of the previous meeting, have dissipated. The fall in US Treasuries has led to a depreciation of the dollar. 

 

Vice-Governor Pablo García’s last monetary policy meeting. Today’s decision was Vice-Governor Pablo García’s last monetary policy meeting, culminating his ten-year tenure at the Board. Discussions on his successor with representatives of political parties represented in the Senate – body that ratifies the Executive’s eventual nomination - should begin in the very short term. 

 

Less restrictive global financial conditions and a more dovish Fed will see the BCCh try to take the policy rate as quickly as possible towards the neutral rate. The output gap is broadly closed, and inflation expectations are anchored pointing to a monetary policy that remains too contractionary. We expect the Board to make the most of the room the financial markets provide it and cut rates by as much as it sees feasible in coming months, including another 75-bps cut in January. The December IPoM will be published tomorrow (09:00 Chile). The Report will contain an update of the structural parameters (likely increasing the real neutral rate by 25-50bps), the central forecast scenario, and the expected path for monetary policy. The minutes of the meeting will be published on January 5. The next Monetary Policy Meeting will be on the final day of January.