The Board assessed cutting (-25bps) or pausing at the July meeting, as opposing inflation risks reared their heads. The minutes reveal that the depreciation of the Chilean peso and confirmation that the INE would not consider subsidies in its electricity price tracking, had pushed up the BCCh's 2H24 and 1H25 inflation outlook. The weakening of the Chinese economy and lower copper prices could lead to a weaker external impulse for the Chilean economy, one of the drivers that had led to a review in the June IPoM’s forecasts. Overall, the scenario pointed to opposing inflation risks, as weaker activity softened demand-side pressures, while supply shocks boosted the CPI outlook, but for now neither risk was imminent nor dominant. The Board favored a pause in July (at 5.75%) to reevaluate the medium-term economic outlook in the September IPoM as well as the adequate policy response. So far, the reaction of inflation and interest rate expectations in the market showed the incorporation of the transitory nature of the price shock.
Overall, the data had not deviated from the trends assumed in the June IPoM. The minutes show that domestic activity was recovering, albeit with domestic demand shifting towards lower consumption and higher investment, while electricity prices pushed up inflation pressures. The mining investment outlook was picking up.
On the external front, developments in the US economy supported expectations that the Fed would start easing monetary policy with one or two 25bp cuts this year. The softening of the Chinese economy could impact local mining investment dynamics ahead, as well as local private sentiment.
While the risks outlined would be evaluated further in the September IPoM, the Board still concurred that the convergence of inflation to the 3% target was consistent with a lower policy rate over the monetary policy horizon. The most appropriate policy options considered at the meeting were pausing at 5.75% and a further 25bp cut to 5.5%. The Board agreed that both options were compatible with the strategy to achieve inflation convergence. Opting for one or the other came down to tactical aspects and the balance of risks, as neither option dominated the other. Nevertheless, given the higher CPI outlook, the Board believes it was reasonable to be cautious and wait for the next IPoM before moving ahead.
Emphasis on incoming data, along with the signaling of pauses and fine-tuning, should pose challenges for the market to interpret the next decisions. We expect another 25bp cut before yearend to 5.5% and for the policy rate to reach 4.5% next year. The central bank’s analyst and trader surveys released this week show cuts in both September and December to 5.25%.
The minutes outline that pauses will be part of the policy strategy ahead. The next monetary policy meeting is scheduled for September 3, and the IPoM to be published on September 4.