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Risks to the scenario stem mostly from the global macro-financial situation.
2023/09/06 | Andrés Pérez M., Vittorio Peretti & Ignacio Martinez Labra

The 3Q monetary policy report (IPoM) reaffirms recent communication that, under the baseline scenario, the central bank sees the policy rate ending the year at 7.75%-8.0%. The rate cuts thus far and the expected easing cycle are consistent with the disinflation process, as supply and demand pressures ease. Likewise, macroeconomic imbalances are being resolved, in line with prior expectations. While the CLP has recently depreciated, the IPoM reports that the nominal exchange rate is below levels of mid-23, with the effect seen in the falling goods inflation. Additionally, global transportation costs have adjusted. The report consolidates our expectation that the Board will likely pursue two further rate cuts of 75bps at the October and December meetings, taking the policy rate to 8.0% by yearend.

The IPoM's projected rate path is somewhat below the 2Q23 IPoM scenario, but in line with recent guidance. While the projection for headline inflation is broadly unchanged, core pressures are estimated to be lower on average, allowing for a somewhat swifter easing cycle compared to the 2Q23 scenario. The policy rate corridor (33% confidence interval) is around 31bps on average below the June edition through 2024 with an average policy rate of 8.88% during 4Q23 (9.5% signaled in the 2Q IPoM; 8.5% priced in the forward curve a week ago) and 5.37% in 4Q24 (5.49% previously).


Minor changes to the IPoM's baseline scenario. Headline inflation will continue to decline, closing the year at 4.3% (4.2% in June), and converge to the target of 3% in the second half of 2024. Core inflation will end 2023 at 6.3% per year (6.5% in June) and reach 3% at the beginning of 2025. The central scenario assumes that the real exchange rate (RER) will remain around current levels during the projection horizon. The implicit one year ex-ante real rate seen by the BCCh during 4Q23 is 5.8%, 0.8pp lower than in the 2Q23 edition. The inflation trajectory has an implicit monthly inflation of 0.33% on average for August and September (we expect 0.4% for August).

In terms of activity, the revisions were small and focused on the mining sector. Growth for 2023 sits between -0.5 and 0.0% (-0.5/0.25% in June). Non-mining activity will return to positive quarterly variations starting at the end of this year, and then gradually expand towards potential, leading to an unchanged estimate of 1.25-2.25% for 2024 and 2.0-3.0% by 2025. The report estimates that, in the coming months, The scenario expects private consumption to remain at levels similar to the current ones in coming months and to consolidate a 4.9% contraction during the full year (in line with 2Q estimate). Growth of 1.7% is forecast for 2024. Gross fixed investment is seen falling 1,2% this year and 0.6% next year. The difference in the estimates for 2023 with respect to 2Q23 is mainly explained by a better performance of machinery and equipment during the second quarter. Overall, the Chilean economy will continue to receive limited support from the external backdrop. As in the June Report, the growth of trading partners is expected to be 2.8% on average between 2023 and 2025. The CAD correction is seen advancing to 3.4% of GDP this year (3.7% previously) in line with the continued recovery of private savings.

As in June, risks to the scenario stem mostly from the global macro-financial situation. The IPoM highlights that the financial risks in the US are compounded by uncertainty about China, especially due to the evolution of its economy and financial market. The implications of these scenarios for monetary policy will depend on how the combination and magnitude of these elements affect the outlook for the medium-term inflation convergence.

We see 75bps cuts for the remaining meetings of the year (to 8%) and to gradually near the neutral rate by the end of 2024. Structural parameters, including trend growth and neutral rates are likely to be updated in December. The minutes of the September meeting will be published on August 14, while the next rate decision will take place on October 26.