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A swifter disinflation path.
20/06/2023 | Andrés Pérez M., Vittorio Peretti & Ignacio Martinez Labra

The 2Q monetary policy report (IPoM) presents an economy that has advanced in resolving the large macro imbalances, resulting in falling inflation and the re-anchoring of inflation expectations, that allows for a less restrictive policy stance going forward. While changes to the overall growth outlook were negligible, private consumption was revised down, supporting a swifter disinflation process this year. The overall signaling of the IPoM is that the conditions have been met to start lowering rates next month. Votes for a 50bp cut by two board members at the June meeting provide an indication of the magnitude of cuts to start off the easing cycle. Beyond that, the size of cuts will likely be determined by the evolution of the macroeconomic scenario and its implications for the inflation path. Given that the corridor’s rate path is not consistent with an easing cycle that would have started with a 50-bp cut in June, we believe split decisions in the near term are probable, with board members differing in the size of the required rate cuts. 


Inflation is set to fall faster than in the previous IPoM, opening the door to a somewhat swifter cutting cycle. The policy rate corridor (33% confidence interval) is around 36bps on average below the March edition through 2024 with an average policy rate of 9.45% during 4Q23 (9.86% signaled in the 1Q IPoM; 9.07% priced in the forward curve a week ago). In our view, such a trajectory is coherent with a yearend rate near 8.25-8.50% (around 8.75% in the previous IPoM), with a 50bp cut expected in July, and a gradual pace increase thereafter.


The central bank expects the economy to continue to adjust from the high spending levels reached in 2021 and 2022. The activity adjustment points to an economy growing between -0.5% and +0.25% this year (ceiling shaved by 25bps from the previous IPoM), with a moderate recovery to 1.25-2.25% next year (a 25-bp range shift). Overall, activity and domestic demand have evolved as expected, although with a greater than anticipated drop in the durable component of private consumption. Investment has remained stagnant for several quarters and recent data such as imports of capital goods, home sales and construction activity reaffirm this outlook. The current account deficit will continue to decline, now expected to reach 3.7% of GDP this year (-30bps from March; 9% in 2022) amid the domestic demand adjustment. 


The gradual correction of macro imbalances, driven by monetary policy, has consolidated the inflation drop. The central bank signals that recent data points to an output gap that resumed its closing process in recent months, as was anticipated in March, and is expected to enter negative territory during the second semester this year. Additionally, cost price pressures have been decreasing. In 2023, headline inflation is projected to average 7.7%, ending the year at 4.2% (7.9% and 4.6%, respectively, in March’s IPoM). For next year, inflation is now seen averaging 3.3% (-30bps from March) and ending the year at 2.9% (3% previously).

The central bank reiterated that the risks facing the Chilean economy are significant and stem mainly from the global macro-financial situation. A deterioration of the global macro-financial backdrop could trigger episodes of high volatility, reduce liquidity and encourage capital outflows from emerging markets. This would lead to a greater than expected tightening of global financial conditions, and likely reduce domestic inflationary pressures further. In that risk scenario, steeper rate cuts would be required than indicated by the lower bound of the corridor.

We expect a 50bp rate cut in July. The re-anchoring of inflation expectations to the target (both analysts and traders), falling inflation and the required adjustment of domestic demand calls for a less restrictive monetary policy stance. The minutes of the meeting will be published on July 06, with the July policy meeting scheduled for July 28.