Macro developments during the two-month break between the first two monetary policy meetings of 2024 should lead the BCCh to step down the pace of cuts. At the end of January, the central bank cut the policy rate by 100 bps to 7.25% and signaled that with inflation falling faster than expected (prior to the January and February prints), the board expected to fast-track the easing cycle explicitly stating that the policy rate would reach neutral (3.5%-4.5%) during 2H24. In the December IPoM’s corridor, the policy rate was projected to reach the ceiling of the neutral range during 2Q25. Along these lines, the Board assessed cuts that were even larger than 100 bps (up to 150bps) in January. However, the April 3 IPoM will incorporate the effects of large inflation surprises, the new CPI basket, the CLP’s depreciation, revised national accounts, and the changing Fed scenario on the policy strategy. We expect the updated rate path to continue to point to a neutral rate in 2H24, but on a more gradual path, toward the upper end of the nominal range (4.5%). Market prices have trended upward from around 4% early in the year to 4.5%-5.0% recently.
Activity remains weak. The economy grew 0.4% YoY in 4Q23, above the 0.2% indicated by the monthly GDP proxy (0.6% YoY in 3Q23). Sequentially, the economy rose 0.1% from 3Q23 to 4Q23, slowing from the 0.8% increase in the previous quarter. Dynamics at the margin were lifted by private consumption (+0.4% QoQ/SA, the first increase since 4Q21), and net exports. Gross fixed investment contracted 3.5% QoQ/SA. Overall, the economy grew 0.2% in 2023, as opposed to the -0.2% IMACEC signal, and in part due to less demanding base effects, as 2021 and 2022 were revised down by 0.4pp in each year (to 11.3% from 11.7% in 2021; to 2.1% from 2.4% in 2022). The 0.2% increase in 2023 is not significantly different to the 0% expected by the BCCh in December. Meanwhile, domestic demand shrunk 4.2% reflecting the domestic adjustment from unsustainable consumption levels along with weak investment. The Board will likely not read too much into the significant sequential activity increase in January (+2% MoM/SA), but still raise the mid-point of the 2024 growth range from the 1.75% in December to around potential growth levels. Sequential employment growth, along with real wage gains are lifting the wage bill and resulting in consumption being the expected driver of activity growth this year. Investment will remain a drag. While the reported investment pipeline has shown a moderate increase from low levels, imports of capital goods during 1Q24 have continued to contract. Private sentiment has been ticking up but remains at low levels.
Inflation last year was well below BCCh’s expectations, but prints during 2024 surprised to the upside. Consumer prices fell by 0.5% in December, resulting in annual inflation ending 2023 at 3.9%, well below the 4.5% estimated by the central bank in its December IPoM. Core inflation unexpectedly fell by 0.2% mom, leading to a 60-bp drop yoy, to 5.4%, also below the central bank’s implicit 5.8% estimate. The disinflation process unfolded faster than expected over the course of last year (during early 2023, analysts expected year-end inflation of 5.3%, 1.4 pp above the actual level of 3.9%). Yet, consumer prices increased by a whopping 0.7% from December to January (asset prices 0.35%) and a further 0.6% to February (asset prices 0.14%). Tradable prices (0.9% MoM) drove headline inflation in January, while services (0.9% MoM) were key drivers in February. To-date, the central bank has downplayed the numbers, highlighting the movements of a handful of items. Nevertheless, CLP dynamics this year will likely translate into further tradable price pressure in coming months. Meanwhile, sequential employment growth along with nominal wage growth that has averaged 7.5% yoy in the last quarter pose upside risks to service inflation dynamics.
The CLP depreciation far exceeds the weakening of peer currencies amid the more aggressive rate cut cycle. With Brazil cutting rates at a steady 50bp pace, Colombia at 25-50bps and Mexico only just starting its cycle with 25bps, the large and varied rate cuts from BCCh have contributed to the persistent depreciation of the CLP, which should filter through to consumer prices. The central bank has previously referenced room that firms have to absorb part of these increased costs through reducing margins, suggesting a lower pass-through coefficient than the typical 10-15% range. This remains to be seen. We expect the Chilean peso to gradually recover from its current levels as monetary policy paths across the globe converge later this year and in 2025. But in the short term we expect the CLP to remain under pressure. Given the CLP’s high average path (already filtering through to higher gasoline prices), increasing private consumption at the margin and upcoming regulated price increases (electricity prices), inflation expectations for the year will likely settle above 3%. We see inflation at 3.5% this year, with risks tilted to the upside.
Smaller rate cuts expected ahead. Inflation above the target, lingering upside inflationary pressures, and a more cautious Fed stance have led us to expect a year-end policy rate of 4.75% (near the upper end of the neutral 3.5-4.0% range), with rate cuts of a smaller magnitude going forward. We expect a 75bp rate cut in the April 2 meeting to 6.5%, followed by cuts of 50 and 25bps thereafter.
