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We expect the easing cycle to continue with a 100bp rate cut to 7.25%.
2024/01/23 | Andrés Pérez M., Vittorio Peretti & Ignacio Martinez Labra

Takeaway: A large downside inflation surprise, medium-term inflation expectations at or below the 3% target, expectations of a weak activity recovery, and orderly domestic financial conditions, open the door for another large cut, as the monetary policy rate is still far above neutral. We expect a 100bp cut to 7.25%, with risks tilted to a larger cut rather than persisting with a 75bp adjustment.

Activity is evolving broadly in line with the central bank’s outlook. The monthly GDP proxy (IMACEC) grew 1.2% YoY in November, the third consecutive annual rise, consolidating the view of flat GDP growth in 2023, in line with the BCCh’s forecast. However, weak household and business sentiment, labor market dynamics, and soft investment indicators suggest the sequential improvement in activity has downside risks. Think-tank ICARE’s business confidence dropped by close to 7pp to 35.7 points (50 = neutral) in December, the most downbeat print of the year. Business sentiment completed 22 months in pessimistic ground, and remains below the average levels prior to the social unrest (October-2019); regulatory uncertainty and increased public safety concerns were flagged as key drivers in the month’s deterioration. Imports of consumer and capital goods in nominal terms declined at a double digit annual rate again in December. The labor market continues to gradually deteriorate, with the unemployment rate rising sequentially by 0.2pp from 3Q23 to 9.0% (SA) in the quarter ending in November, as a growing share of new jobs stem from informal self-employment, low labor demand, and rising layoffs (unemployment insurance payouts up by 28% YoY in October). Credit continues to contract in annual real terms. The positive output gap is expected to have closed by the end of 2023, with the BCCh projecting the output gap to remain negative for the two-year policy horizon.

The CLP has weakened since December, but has so far not had an impact on inflation expectations. Arguably, FX performance (CLP volatility rather than the level of the exchange rate) has played a more important role in monetary policy decisions throughout this easing cycle. Since the 19-December monetary policy meeting, the USDCLP has trended up depreciating by around 5.6% through January 22, ranging between 871 and peaking near 930 by mid-January, in the context of swings of broad dollar strengthening (0.8% since 19-Dec), changes in expected interest rate differentials (mainly driven by the large negative inflation surprise), and the appearance of dollar sales by the Government. Large recent dollar sales by the MoF provide some resistance to further CLP weakening, albeit transitory. While the BCCh’s analyst survey (surveyed after the December inflation surprise) shows medium-term inflation expectations still anchored at the 3% target, the BCCh’s trader survey (surveyed prior to the December inflation surprise) and break-evens continue to reflect inflation expectations that are below the 3% target (EOF one-year CPI: 2.5%; BEI one-year: 2.2%).

The swifter inflation end to 2023 has been the most significant development. Consumer prices fell by 0.5% in December leading to annual inflation ending 2023 at 3.9% (down from 4.8% in November), well below the 4.5% forecasted by the BCCh in the 4Q23 IPoM. The monthly price decline was significantly greater than the BCCh’s implicit monthly estimate (0.0%), consensus (-0.1%, range between -0.2 % and +0.2%) and our call (-0.14%), with widespread declines, especially in volatile items (particularly tourism packages: -7.5% MoM). Nevertheless, core inflation (-0.2% MoM) also surprised the BCCh to the downside in December, with an implicit 4Q IPoM expectation of +0.15%. Inflationary pressures at the margin are near target levels. Inflation accumulated in the quarter declined sharply to 3.6% (SA, annualized; 3.0% in September), while core inflation sits at 2.6% (SA, annualized; in line with the Sep-23 reading). Our internal estimates point to inflation reaching 3% by the end of 1Q24.


Claudio Soto’s first Monetary Policy Meeting in the BCCh Board. With Vice-Governor Pablo García exiting the BCCh Board after his ten-year term on January 19, Claudio Soto will debut in the Board’s January policy meeting. Prior to joining the Board, Mr. Soto’s rate calls throughout the hiking cycle that began in July 2021 and the ongoing easing cycle were persistently in line with consensus (with a few exceptions), without a systematic bias in any given direction.

We expect the easing cycle to continue with a 100bp rate cut to 7.25%, broadly in line with current market pricing. The latest BCCh analyst survey showed 39.5% of respondents favored a 100bp cut, with a slightly smaller share expecting 75bps (37.2%), with the upcoming traders survey (to be published on January 26) likely to show a higher share of respondents favoring a triple digit cut. After the December cut to 8.25%, the one-year ex-ante real rate (using inflation expectations from the BCCh’s analyst survey) fell to 5.25%, still well above the BCCh’s 1% neutral real rate. We expect a frontloaded easing cycle to continue in 2024, with the size of the cuts to be largely conditional on domestic financial conditions, ending the year at 4.5%, close to nominal neutral levels. After January, the next monetary policy meeting takes place on April 2, with the 1Q24 Monetary Policy Report to be published on April 3.