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Swifter CLP appreciation pass-through supported lower rate trajectory.
2023/08/14 | Andrés Pérez M., Vittorio Peretti & Ignacio Martinez Labra

The minutes of the July 100bp rate cut meeting reinforce the Board’s new baseline scenario of a yearend rate between 7.75% and 8.00%. While activity was in line with the 2Q IPoM, inflation fell somewhat faster (likely due to a swifter pass-through of the CLP’s appreciation). As a result, the Board decided on a rate path somewhat below the central scenario of the 2Q IPoM (around 8.75%). Considering the BCCh’s updated yearend signaling, the Board assessed only two options in the meeting to begin the easing cycle: cuts of 75 and 100bps. The Board also signaled that, depending on the accumulated information, adjustments of similar magnitudes (given the need to implement a total adjustment of between 325 and 350bps by yearend) could take place in the next few meetings. The Board agreed that the size of the first move did not impose any conditions on succeeding meetings, stating they could be smaller, in line with the Governor’s prepared remarks last week. Hence, the considerations in deciding between the two options in July was linked to tactical elements and the relative balance of risks for the inflationary convergence.  


Regarding the tactical issues, the Board agreed that risks of the market interpreting a 100bp cut as “dovish” could be mitigated by clear communication. Central bankers noted that the 75bp option would be less surprising, as it reflected the median of market expectations. However, the Board recognized that a significant share of the market expected a larger cut. Some members voiced concerns of the impact that a 100bp cut may have on market expectations (a dovish interpretation could see further short-term rate declines and a larger CLP depreciation). To combat such a response, the Board believed clear signaling that the updated path would see rates end the year around pre-meeting survey levels (7.75-8.00%) would alleviate the risk.   


In terms of inflation risks, the Board agreed that they were more balanced. Several central bankers anticipated reduced inflationary pressures, while market pricing had also adjusted down. However, one Board member noted that although there was a lower likelihood of a large inflation event, there remained risks that stemmed from a prolonged high inflation period and above target inflation expectations on price formation dynamics. 


We expect rate cuts to proceed at a 100-bp pace in the near term. The minutes reiterate the Governor’s comments last week regarding the possibility of smaller cuts, which we interpret as the Board’s concern on some expecting an acceleration in the pace of rate cuts. We see a year-end rate of 7.25%, below the 7.75% outlined in the most recent trader survey. Given how contractionary monetary policy still is, we believe the board is unlikely to ease the pace of rate cuts in the short term. Nevertheless, the persistence of the CLP’s recent depreciation and the reinforcement of BCCh signaling pose upside risks to our yearend call. The next monetary policy meeting is on September 5 and 3Q IPoM on September 6.