The 1Q monetary policy report (IPoM) revised growth and inflation forecasts up, signaling the need for the policy rate to remain high for longer. The updated scenario considers the current level of rates (11.25%) and a gradual easing to 9.9% on average during 4Q23 (corridor’s 33% confidence interval; 8.5% in the 4Q22 edition) to now be coherent with correcting the large macro imbalances accumulated in recent years, and ensure inflation converges to the 3% target over the two-year policy horizon. In our view, this signaling confirms the low likelihood of a rate cut in the very short-term, with 3Q23 start (July or September) likely. The central bank expects the economy to continue to adjust ahead from the high levels of spending that it reached in 2021 and 2022, but more gradually. The slower activity adjustment has led to the expectation of a more gradual inflation convergence path ahead. In 2023, headline inflation is projected to average 7.9%, ending the year at 4.6% (6.6% and 3.6%, respectively, in December’s IPoM).
The global economic landscape has become more complex in recent weeks. Nevertheless, Chile’s main trading partners are projected to grow 2.4% this year (2.1% in December). The central bank highlights that the current scenario is associated with a higher degree of uncertainty than usual. On the one hand, the risk of a more abrupt deterioration in the external scenario stands out, with greater implications for Chile. On the other hand, the slow decline in domestic consumption could result in more complex inflationary dynamics.
The slow correction of private consumption is a relevant factor behind higher inflation. The revision of National Accounts between 2020 and 2022 showed that household consumption was about USD 4.3 billion higher than previously estimated. National savings figures were revised downward and the current account deficit increased, revealing that macroeconomic imbalances were greater than initially anticipated. Data for the end of 2022 and at the start of this year show that the pace of the private consumption adjustment has once more been less intense than expected, which is consistent with employment that has picked up and lower domestic political-economic uncertainty. In contrast to the behavior of consumption, investment has been week for several quarters, consistent with higher credit costs, and the weak business sentiment. In the baseline scenario, the economy is expected to be flat this year (range of -0.5 and +0.5%; a 125bp improvement versus the 4Q scenario). For 2024, the more challenging base effect leads to an increase of between 1 and 2% (down 100bps). The current account deficit will continue to decline to 4% of GDP by the end of this year (-90bps from December; 9% in 2022).
The Chilean economy continues to face high risks. The IPoM notes that if the deterioration of the external backdrop exceeds the BCCh's scenario, inflation in Chile may fall faster, supporting a more aggressive rate cut cycle, below the lower bound of the corridor. However, if private consumption continues strong, the disinflation path could be even slower, leading to a policy rate path that is above the upper bound of the corridor. We interpret the latter risk as a reference to how policy would respond if additional spending measures were to be approved (particularly a new pension fund withdrawal).
The rate trajectory in the central scenario, along with the central bank’s inflation forecasts point to an ex-ante one-year real rate that continues to rise in 3Q23 (to 7.7%), while the 4Q22 outlook saw the real rate easing from the start of this year. Overall, we have pushed back our expectation for the beginning of the easing cycle from June to July, and now consider a more cautious cutting pace that results in a yearend rate of 9.25% (8% previously). March CPI to be published tomorrow will be key, with the BCCh expecting a 1% increase in the month, below consensus and our call at 1.1%. The IPoM made no reference to the NDF program, (USD 9.1 billion full rollover set to expire in June).
Andrés Pérez M.
Ignacio Martinez Labra