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A larger than expected cut to begin the cycle.
2023/07/28 | Andrés Pérez M., Vittorio Peretti & Ignacio Martinez Labra

The central bank’s board unanimously surprised with a larger-than-anticipated 100bps cut to begin the easing cycle, above market consensus and pricing (both at 75bps) and our call (50bps). While the board acknowledges that the June IPoM’s macro scenario remains valid, a faster disinflation path, both in the headline and core components, have allowed for larger cuts in the short term. As such, the communiqué explicitly states that cuts in the short term should be of a similar magnitude as recent surveys; the traders survey released this week has 100bps cuts in the next few meetings with the policy rate reaching 7.75% by yearend. In this context, we expect the yearend rate to come in well below the 8.75% signaled in the June minutes, and closer to the 7% floor of the IPoM’s corridor. With the decision, the one-year ex ante real policy rate (using the analyst survey inflation expectation) is roughly at 6.75% (7.25% at the June meeting), still significantly above the central bank’s neutral real rate estimate of 0.75%.


The external backdrop is expected to remain weak. While inflation has broadly surprised to the downside in several economies, fundamentals still point to the need of a restrictive policy stance, reflected in ongoing rate increases in several advanced economy central banks. As such, the external impulse for the Chilean economy is projected to remain subdued.


No surprises on activity or the labor market. On the local front, the communiqué states that activity and demand have been essentially in line with their forecasts. Consumption and investment have performed similar to the BCCh’s central scenario, while the labor market remains unchanged, with an explicit reference to the June 8.5% unemployment rate published today.


The recent downside surprise to inflation was key. Headline and core inflation have surprised to the downside with respect to the June forecasts, with most of the surprise concentrated in tradables. An explicit reference is made to the anchoring of two-year ahead inflation expectations at the 3% target in both the traders and analyst surveys.


The decision and forward guidance point to a fast adjustment of monetary policy ahead. We believe our current year-end rate call of 8% has become the ceiling. In the aftermath of the divided decision in June to stay put, with two members voting for a 50bps cut, the June inflation surprise was sufficiently large to convince remaining board members to jump start the cycle with a unanimously larger than expected cut. In line with the communiqué’s guidance, rate cuts are likely to proceed at a 100bps pace for each of the remaining three policy meetings this year, leading to a rate of 7.25%. As such, the policy corridor would be revised down materially in the September IPoM. Regarding market reaction, we expect additional depreciation pressure on the CLP, while the market implied path is likely to dive further down towards 7% (from roughly 7.6%) by yearend. The minutes of the meeting will be published on August 14, with the next policy meeting scheduled for September 5 (and the 3Q IPoM on September 6).