In a unanimous decision, the central bank’s board cut the policy rate by 50bps to 9%, slowing the pace of rate cuts for the second consecutive meeting. The cut was smaller than the 75-bps expected in our call, the median of surveyed BBG analysts, the BCCh’s analyst survey and the traders survey. With today’s decision, the BCCh has cut the policy rate by a total of 225bps since beginning the easing cycle in July. The one-year ex-ante real rate is now estimated at 5.7%, reflecting a less contractionary monetary policy stance (7.75% cycle peak in July prior to the easing cycle), yet still well above the BCCh’s neutral range estimate (0.5%-1%). In sum, the decision took place in the context of a local macro scenario that has been essentially in line with the BCCh’s view, but with a marked deterioration in global financial conditions. The statement even scrapped the forward guidance, pointing to a reassessment of the policy corridor in the December IPoM. Separately, the lower-than-expected cut was accompanied by a suspension of the reserve accumulation program, pointing to the Board’s concern on the recent underperformance of the CLP, and its implications on the inflation trajectory, and inflation expectations.
Tighter external financial conditions as the main concern. The communiqué states that the main development since the previous meeting has been the tightening and volatility of global financial conditions, with higher uncertainty from geopolitical tensions. Rates at the long end in the US have increased significantly, as the Fed has reinforced guidance on a higher for longer policy stance, contributing to an appreciation of the global dollar, and a negative correction in stock markets. Greater uncertainty associated to geopolitical tensions and production cuts by OPEP+ have enhanced oil price volatility. The domestic financial market has reacted to these global movements, with long rates rising and the local stock market accumulating losses. The peso has depreciated around 9% since the previous meeting. Credit continues to weaken.
No surprises on the activity front. In terms of activity, despite the fact that activity has been affected by one-off factors at the margin (education strike in July; increased rainfalls in August), it has been broadly in line with the September IPoM. Consumption and investment remain contained. The labor market has weakened, in line with the evolution of the economic cycle, captured in a rise of the unemployment rate to 9% in August, a fall in employment, and pessimistic household and business expectations. Inflation has continued its downward path where the decline has been somewhat faster for Core CPI, particularly in goods. Moreover, inflation expectations, both the EEE and EOF, continue to be anchored at the 3% target at the two-year horizon.
Reserve accumulation program suspended... Separately, the BCCh also decided to suspend the reserve accumulation program and stop unwinding the stock of NDFs, due to tighter global financial conditions. The BCCh had purchased a total of USD3.68bn in the spot market since June 13, falling well short of the program’s objective of USD10bn. The outstanding stock of NDF remaining to be unwound stands at approximately USD2.7bn, down from USD9.1bn in April 2023. Put together with the decision to cut the policy rate by less than was expected by markets, this decision should transitorily reduce the pressure on the currency.
… yet should resume eventually. In our view, the BCCh’s international reserves are still low (USD41bn by the end of September, roughly 13.5% of GDP), well below the 18% of GDP target they have mentioned in the past. As a result, we believe the BCCh will resume a reserve accumulation program and the unwinding of the NDF stock once financial conditions ease.
No free lunch: Better FX performance, no guidance, higher rates, weaker activity. Even though the domestic macro scenario has evolved broadly in line with the BCCh’s view, tighter global financial conditions led them to downshift the pace yet again, scrap guidance, and halt the reserve accumulation program. While recent underperformance of the CLP is likely to revert transitorily, it should continue to swing in line with global drivers. Scrapping guidance suggests we are likely to see a reassessment of the policy corridor, that balances higher inflation risks stemming from a weaker CLP and higher oil prices, with weaker activity. Rate cuts are likely to continue in December, with the pace contingent on global conditions. Pressure for larger cuts is likely to resume if activity and labor market data disappoint next week. The next RPM will be on Tuesday, December 19, with IPoM to be released on Wednesday, December 20.
Andrés Pérez M.
Vittorio Peretti
Ignacio Martinez Labra