In October, the BCCh’s Board unanimously cut the policy rate by 25 bp to 5.25%. The meeting’s minutes state that all Board members agreed that the information accumulated since the September meeting consolidated the IPoM’s baseline scenario. Activity was broadly in line with expectations, while September inflation had been somewhat lower than expected, although due to volatile factors (food and fuels). Global activity and inflation had also evolved in line with forecasts. Regarding sensitivity scenarios, there were doubts about the evolution of the labor market, in addition to the increase in geopolitical tensions around the world. Inflation expectations were still aligned with a scenario where the rise in inflation would be transitory. Overall, the BCCh’s central scenario remained in full force and so the policy rate needed to be further lowered towards its neutral level (4% nominal). The Board believed that the only plausible option was to cut the policy rate by 25bps.
The option to cut by 25bps was not only consistent with the macroeconomic scenario but was also tactically the most appropriate as it was largely expected by the market, and in line with previous signaling. High frequency indicators linked to consumption and investment reflected stability. The unemployment rate had edged up, while wages were converging to historical averages after a period of swifter growth. In line with internation trends, domestic long-term interest rates had risen after several months of decline. The CLP had depreciated and fluctuated in line with fundamentals. The transmission of monetary policy to market interest rates was unfolding smoothly, but bank credit, particularly commercial loans, remained weak.
Our Take: We expect the Board to continue with another 25bp cut in December to 5%. Going forward the evolvement of the labor will be key to monitor in determining whether the rise in the unemployment rate was an indication of greater slack (tilting risks towards extending the cutting cycle), while the effect of the electricity price hikes on medium-term inflation expectations would also determine the magnitude of policy space going forward. On the external front, the aggravation of geopolitical risks is also relevant. We see the policy rate reaching 4% during the first half of 2025. The final policy meeting of the year will take place on December 17.