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BCCh Board set to tread carefully.
2024/07/04 | Andrés Pérez M., Vittorio Peretti & Ignacio Martinez Labra

Following the June IPoM's main messages, the June MP meeting minutes reflect on the effect of higher electricity prices, noting that the inflation targeting framework should allow to flexibly accommodate the supply shock without raising nominal rates, conditional on limited second-round effects. The Board added that as long as the output gap remained relatively closed, medium-term inflationary pressures were in line with convergence to the target and expectations remained anchored at 3%, the policy rate should continue to be reduced over the policy horizon. Beyond the decision to cut by 25 bp, several Board members evaluated the options of lowering it by 50 bp (one vote) or staying at 6%.


In the Board's view, the 25 bp option could highlight the transitory nature of the supply-shock, consolidating expectations of lower rates over the forecast horizon. The option also gave the Board flexibility to implement another cut during the remainder of the year if the central scenario materialized. The 50 bp option was deemed appropriate under a sensitivity scenario (weaker activity, greater effect of electricity hikes on disposable income), however, under the baseline scenario it would restrict the Board to signal a prolonged pause in the process of lowering rates. Regarding the option to maintain the policy rate unchanged at 6%, the Board mentioned that it could send an incorrect signal about the risks analyzed by the Board.


Regarding activity, the contractionary effect of energy costs on real household income was seen to be counterbalanced by greater domestic demand momentum, given improved fundamentals, and a higher copper price outlook. However, recent weakening of commercial credit required close monitoring, as it could signal less favorable demand dynamics ahead (see our note on May credit here).  


Our take: The fact that some Board members analyzed the decision to pause in June is consistent with our view that the Board will tread carefully in the aftermath of the June IPoM’s higher inflation forecasts. After bringing the one-year ex-ante real rate (2.55%) closer to neutral (0.5-1.5%), the Board has gained more flexibility for future decisions, also considering that the BCCh is expected to revise the neutral real rate and other structural parameters in September (we expect the center of the neutral real rate range to be revised slightly higher). Our current scenario holds two 25 bp cuts to 5.25% this year before pausing the cycle. However, the signaling from the minutes suggests the pause will take place somewhat earlier, likely at 5.5%, before further cuts unfold in 2025 amid some loosening of global financial conditions and more clarity on second round effects of electricity prices. In the lead-up to the July MP meeting (31st), the evolution of inflation in June (8th) and inflation expectations from both the analyst (10th) and trader (8th and 26th) surveys will be key in determining whether the Board advances with another 25bp cut this month.