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Smaller rate cuts expected ahead.
2024/04/02 | Andrés Pérez M., Vittorio Peretti & Ignacio Martinez Labra

In a unanimous decision, the BCCh cut the policy rate by 75-bps to 6.5%, in line with market consensus and our call. Since beginning the easing cycle in July of 2023, the BCCh has cut a total of 475-bps, significantly narrowing interest rate differentials with the U.S. The guidance suggests the policy rate will continue falling but does not refer to a given moment in which it will reach neutral (in contrast to the explicit reference to 2H24 in the January guidance). Clarity regarding the rate path and updated macro forecasts will be released in tomorrow’s IPoM. While the Board highlighted the rapid inflation fall last year, it notes the need to closely monitor inflation and its determinants, following large positive inflation surprises at the start of the year and the passthrough effect of the CLP depreciation. Following the decision, the ex-ante one-year real rate falls to 3.50%, still above the BCCh’s neutral rate estimate of 1%.


Externally, global inflation has continued to decline, although there are risks associated with increased costs - mainly transportation and fuel - and the persistence of high levels of service inflation. In turn, market expectations have postponed the start of the easing cycle in the US, amid resilience of economic activity. Since the January meeting, both short- and long-term Chilean rates have risen, and the peso has depreciated. Interest rates on loans, especially commercial, have reflected the monetary policy transmission.  


Inflation in January and February exceeded expectations, in part responding to CLP depreciation, rising global prices and local price readjustments. Medium-term inflation expectations remain at the 3% target. A section in the communiqué refers to the contrast between the data from the end of 2023 and beginning of 2024, highlighting the difference between somewhat better than expected activity and weaker demand. The 2023 National Accounts showed that consumption performed below expectations throughout the year and that investment fell significantly in the second half, particularly in its tradable components. So far this year, supply factors and a greater external impulse are supporting activity. The labor market’s performance has remained consistent with the cyclical adjustment.


Our Take: Smaller rate cuts expected ahead. Inflation above the target, lingering upside inflationary pressures, and a more cautious Fed stance lead us to expect cuts of 50-bps in the near term, and then eventually slowing to 25bps once the policy rate approaches the upper end of the 3.5-4.5% neutral range. The Board highlights how the significant macroeconomic imbalances were significantly reduced last year, along with a sharp inflation fall and anchored CPI expectations (permitting the swift rate cut cycle seen so far). Nevertheless, the BCCh also flags the inflation rise at the start of 2024 and the greater pressures on imported costs, emphasizing the need to continue closely monitoring its evolution. We believe these pressures merit a more gradual path from here on, in line with our view prior to the decision. As such, the policy rate is unlikely to reach the upper bound of neutral this year. The IPoM, to be published tomorrow at 9am local time, will include updated macro forecasts, including a revised corridor. We expect upward revision to both GDP and CPI. This meeting’s minutes will be published on April 17, and the next monetary policy decision is scheduled for May 23.