The minutes of the unanimous decision to hold the policy rate at 11.25% earlier this month show concerns within the board that the correction of macro imbalances has been slow. In this context, the BCCh maintained the guidance that the policy rate would remain at 11.25% until there are clearer signals of inflation converging towards the 3% target. The outlook in the central bank’s view has a higher degree of uncertainty than normal. On the one hand, risks of inflation being even more persistent could lead to further monetary policy tightening, while on the other hand, risks of a disruption in the external scenario could lead to “aggressive” interest rate cuts.
The global activity outlook had worsened. The local economy will likely be affected more clearly in the second half of the year by lower external demand and tighter global financial conditions following the banking sector stress abroad.
Core inflation is not declining and activity has not adjusted as expected. Revisions to the National Accounts showed that consumption was much higher for several quarters, consistent with more persistent inflation. In this context, Board members considered no other option but to maintain the policy rate.
We expect the easing cycle to start in the July policy meeting (July 27), with gradual cuts to a year-end rate of 9.25%, and then 4.75% next year. In this context, the Board may begin to consider the option of cuts in the June policy meeting, setting the stage to begin an easing cycle in July. Nevertheless, if core inflation in upcoming readings shows greater stickiness than expected, rate cuts will likely be postponed further.
Joao Pedro Resende
Andrés Pérez M.