In the December monetary policy meeting, the Board assessed reducing the policy rate by 50 or 75 basis points from 9.0%, unanimously deciding to step up to 75bps, taking the policy rate to 8.25%. The BCCh’s December policy meeting minutes reiterates several points that were stressed in the December IPoM. First, the economy’s performance had been essentially in line with the September IPoM’s baseline scenario, albeit with the main development in the domestic front related to a faster decline in core inflation. The stress in global financial conditions which contributed to another slowdown in the pace of rate cuts to 50bps and the suspension of the reserve accumulation program in October, had swiftly reversed prior to the December meeting, clearing the way for the BCCh to continue with cuts as had been outlined in the September IPoM. In this context, the Board assessed reducing the policy rate by 50 or 75 basis points from 9.0%, in the end unanimously deciding on a step up to 75bps cut to 8.25%. As was stated in the December statement, forward guidance would signal further easing, yet the minutes explicitly mention the policy rate will reach the neutral level in 2025. We expect the Board to continue easing by 75bps in January and continue approaching neutral throughout 2024, as global financial conditions and their implications on domestic market conditions will be key in determining the magnitude of cuts on a meeting-by-meeting basis.
Downplaying November’s upside CPI surprise. The minutes highlighted that the convergence path of inflation towards the 3% target by the second half of 2024, downplaying the November CPI print (+0.7% MoM, with consensus at 0.2%) due to the nature of the surprise (mainly driven by volatiles). Inflation had declined by more than 9 percentage points from its peak (August 2022 at 14.1%), thus confirming the clear disinflation path to the 3% target.
We expect the easing cycle to continue with a 75bps cut in January, and approaching neutral throughout 2024. According to our estimates, the one-year real ex-ante rate reaches 5.15%, still well above the BCCh’s 1% estimate, leaving plenty of space for the Board to continue cutting at the 75bps pace in the near term. Global financial conditions and their implications on domestic market conditions will be key in determining the magnitude of cuts on a meeting-by-meeting basis. Important factors to monitor prior to the January 31 policy meeting are the December CPI (to be published on Monday January 8) and, naturally, the development of global financial conditions. Of note, the Government has not yet nominated the replacement of current Vice-Governor Pablo García, raising the risk that only 4 Board members vote in the January policy meeting as the nomination must be approved by the Senate.
Easing set to continue.
2024/01/02 | Andrés Pérez M., Vittorio Peretti & Ignacio Martinez Labra