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We expect the BCCh to continue to swiftly cut rates in the short term.
2024/01/31 | Andrés Pérez M., Vittorio Peretti & Ignacio Martinez Labra

The central bank’s board voted to cut the policy rate by 100bps to 7.25% in a 4-1 split. The cut was in line with market prices, the Bloomberg market consensus and our call. The surprise came from a dissenting vote, by Luis Felipe Cespedes, that favored a larger 125bp cut. The press release highlighted that the disinflation process is expected to unfold faster than outlined in the December IPoM and the appropriate rate trajectory will likely see the neutral rate reached during 2H24. The BCCh estimates the neutral nominal rate between 3.5% and 4.5%. Following the decision, the ex-ante real rate fell to 4.25% (5.15% in December; neutral real rate between 0.5% and 1.5%).


On the external front, global inflation has continued to decline amid global activity with limited dynamism (barring the US). The BCCh notes that the market delayed the expected start of the easing cycle in the US to the end of 1H24, affecting global financial conditions (with the dollar strengthening since the last meeting; the CLP depreciated 6%). Geopolitical tensions in the Red Sea boosted transportation costs and raised oil prices. Copper has remained broadly stable. 


Domestic activity has evolved in line with the December IPoM. Both consumption and investment have not shown significant changes in recent data. The labor market loosening is evolving in line with the economic cycle. Private sentiment remains in pessimistic territory. The BCCh’s Bank Credit Survey for 4Q23 shows still restrictive supply conditions, especially for large companies and in sectors such as construction and real estate. Credit demand shows improvements in the consumer portfolio, although it remains weak in other segments. Interest rates on commercial loans continued to fall, while longer-term mortgage loans remain high in historical perspective.


Inflation is falling fast. In December, total and core inflation fell sequentially, surprising the central bank. Annual inflation ended 2023 at 3.9%, well below the 4.5% estimated by the BCCh. Goods inflation continues to fall swiftly while services is somewhat more sticky. Survey-based inflation expectations remain around the 3% target. No mention was made of the potential effects of the new CPI basket (to be published in February). A detailed analysis on its potential effects on inflation forecasts is expected in the April IPoM (we estimate the new basket brings a downside bias to recent inflation dynamics).


Overall, with inflation expectations anchored, inflation to reach the 3% target ahead of schedule, the positive output gap having closed, monetary policy must quickly fall towards neutral to avoid the risks of overtightening. In the short-term we expect the BCCH to continue to swiftly cut rates, and more significantly moderate the pace of cuts towards the second quarter. We expect a yearend rate of 4.5% (the upper end of neutral estimates), but likely to be achieved earlier than our December call, given the updated guidance.