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Caution ahead as inflation to be revised up

At the June Monetary Policy Meeting, the Board of the Central Bank of Chile (BCCh) decided to cut the monetary policy rate by 25bp to 5.75%, in line with market consensus and our call. The Board was split, with Stephanie Griffith-Jones favoring another 50bp cut. The last divided decision was in January (again arguing for a larger cut). The communique signals that the central scenario of the BCCh considers further easing ahead, but that the bulk of the adjustment has now unfolded. The guidance suggests the end of the cycle is closer and opens the door to pauses ahead. The 25bp cut is a further moderation from the pace in the three prior meetings this year (100, 75, 50bps). With today's decision, the BCCh has reduced the policy rate by a total of 550bp from the cycle maximum of 11.25% in July 2023. The real ex-ante one-year rate, obtained by discounting the one-year inflation expectation according to the analyst survey, fell to 2.55% after the decision, still above the real neutral range (0.5% - 1.5%).


Global inflation continues to ease but at a more moderate pace; long-term interest rates remain high. Global financial market movements remain respondent to expectations about when the Fed will begin to cut rates. Since the May meeting, market rates at the long end in developed markets have fallen. Locally, short-term interest rates have decreased in line with the transmission of monetary policy easing, while longer-term rates, including mortgage rates, have remained at historically high levels, responding to the behavior of external peers. Copper prices have retreated from levels seen at the previous meeting but remain elevated.


Copper to boost domestic demand, while electricity set to be a significant inflation driver. The macroeconomic scenario has evolved as expected, although domestic demand grew somewhat above expectations in 1Q24. Recently domestic commercial credit has shown a certain slowdown that will be monitored (as it reflects domestic activity dynamics). Inflation has continued to decline, with two-year inflation expectations remaining at 3%. The adjustments signaled for the June IPoM (out tomorrow) will come from improved domestic demand on the back of a higher copper price scenario (USD 3.85/lb average in the 1Q IPoM). On the other hand, the readjustment of electricity priced will significantly impact inflation, particularly in 2025 (1Q IPoM had a yearend rate of 3.0%;

Link to our recent electricity report).


Our Take: A scenario of higher inflationary pressures and improved domestic activity will add a layer of policy caution but not halt the cutting cycle. The cost-push nature of the relevant upward revision expected to the BCCh inflation forecasts is unlikely to de-anchor inflation expectations at the two-year policy horizon. However, the persistence of higher copper prices may lead to an improved investment outlook that may raise demand-side inflationary pressures. In sum, the scenario favors a cautious approach as rates near the nominal neutral range (3.5% - 4.5%). Developments on the global financial conditions will also play a key role in determining the end point of the current cycle. The 1Q24 IPoM showed a corridor path (33% confidence interval) that averaged 5% in 4Q24 and 4% in 4Q25. We expect the path to neutral to be even slower. Our current scenario sees rates pausing at 5.25% this year before resuming a downward trend to 4.5% during 2025. The BCCh will publish the June IPoM tomorrow (June 19) and minutes on July 4. The next monetary policy meeting will be on July 31.


Andrés Pérez M.

Vittorio Peretti  

Ignacio Martinez Labra