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The benefit of not surprising.
2024/06/07 | Andrés Pérez M., Vittorio Peretti & Ignacio Martinez Labra

The May minutes show the Board evaluated a cut of 75bp and 50bps before opting for the latter to take rates to 6%. All five Board members agreed that further cuts were required as the macroeconomic scenario was evolving in line with assumptions in the March IPoM. In this scenario, all the Board members considered 50bp and 75bp cuts to be plausible options. Given the macro coherence with the March IPoM scenario, the option of lowering the policy rate by 50bp clearly dominated when the two alternatives were contrasted. The 50bp-cut option had the advantage that it was widely expected, while highlighting that the market consensus was a product of prior signaling from the Board (rather than the Board following the market).


The global economy had performed in line with the IPoM's scenario. The most significant development was the sharp increase in the price of copper. The Board noted the need to evaluate the persistence of the shock and the pass-through mechanisms to the domestic economy. At the same time, the discussion also highlighted the need to review the inflationary pressures the economy would encounter over the medium-term.


The central bank noted that upside adjustments to electricity prices could be above what is currently priced into the central scenario (3.8% yearend inflation). At the time of the May meeting, the market curve signaled a sequence of small cuts that would place the policy rate at 5% by the end of the year, and then stay at 4.75% throughout the policy horizon. In real terms, this involved a rate above the ceiling of the current neutral MPR estimate (3.5 to 4.5% range), a situation that required analysis. Several reasons were brought up to explain why this could occur, including a different assessment of the neutral rate and the expected monetary policy trajectory of the U.S. Federal Reserve.


Our Take: The BCCh has much less room left to get to neutral (around 4% nominal), and the main risk we see going forward continues to be the external scenario, especially heightened by geopolitical tensions and market jitters related to Fed repricing. The May communique and minutes signal, in our view, that we cannot rule out a consecutive 50-bp cut if favorable CLP dynamics persist and global financial conditions ease ahead of the next meeting. However, our base case considers a 25bp cut this month. We continue to envisage a year-end rate of 5.25%. During 2025, as the Fed embarks on policy easing, we see the BCCh resuming its cutting cycle and taking the policy rate to 4.5% (the upper bound of the 3.5%-4.5% neutral range). Overall, we believe global developments will be the key as to whether the BCCh may lower rates even further or pause above our path.