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We expect the Board will continue with the 100bp rate cut pace in April.
2024/02/15 | Andrés Pérez M., Vittorio Peretti & Ignacio Martinez Labra

The minutes of the January meeting showed several Board members evaluated cutting the policy rate by either 100bps or 125bps. The former, and eventual choice, provided the benefits of predictability, while the latter would help take the policy rate towards neutral levels faster (deemed appropriate given a closed output gap and the swift inflation fall). One board member believed a 150bp should have been assessed, but preferred to wait to the next IPoM (April 3) to incorporate a potential change to the monetary policy strategy. While the majority opted for the 100bp cut, they emphasized the importance of signaling that the MPR would reach the neutral level earlier than expected in the December IPoM.


At the January meeting, the key development since December had come on the inflation front. The Board highlighted the size of the CPI surprise (-0.5% MoM, BCCh implicit forecast at 0.0%), and the fact that it came on the back of several inflation downside surprises in previous months. The Board noted the importance of understanding the implications of lower inflation on its future path as well as on monetary policy. Lower inflation also raised doubts about the output gap. An assessment of the CLP pass-through from the depreciation was an area of interest (in our view, even more so now, considering exchange rate dynamics after the January meeting). The Board indicated that several sources suggested businesses had sufficient margins to accommodate higher imported costs (especially given weak domestic demand). At the meeting, the Board preferred to wait for the new CPI basket information before evaluating its implications on the inflation trajectory. Of note, after the new basket's release, the Central Bank noted in a blog that the new basket does not suggest significant changes in the aggregate inflationary dynamics of recent months yet will be fully analyzed in the next IPoM.  


While the minutes give the impression that the Board saw moving towards an even more aggressive rate cut path, events since the decision suggest an acceleration in the pace of cuts seems unlikely. Since the January meeting, the CLP has depreciated by a further 3% (10% accumulated since the December meeting), while the January inflation print surprised to the upside (+0.7% MoM). These developments have contributed to a 50bps increase over the last month in year-end 2024 market-implied inflation, up to the 3% target. Additionally, strong employment data in the US along with an upside inflation surprise has seen a pushback in the start of rate cuts by the Federal Reserve, amplifying the effect on local financial metrics. The combination of these factors lead us to expect the Board will continue with the 100bp rate cut pace in April, rather than accelerate the pace. We see the policy rate reaching 4.5% during the 2S24.