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We expect a 75-bp cut for October Monetary Policy Meeting.
25/10/2023


In the context of a frontloaded easing cycle that began in July, having delivered a total of 175bps in cuts so far, we expect the BCCh to cut by 75bps tomorrow, maintaining the pace of cuts in the sixth monetary policy meeting of the year, yet tweaking the guidance to signal smaller rate cuts ahead. Separately, we do not expect changes to the reserve accumulation program nor the NDF program.

 

Tighter global financial conditions. Since the BCCh’s September policy meeting (September 5), risks of a slower disinflation path in advanced economies have increased, supported by several factors, including labor market tightness, elevated energy prices, and the effects of fiscal largesse. As such, monetary policy in AEs is expected to remain contractionary for a prolonged period. Financial conditions have tightened further, reflected by the sustained rise in the yield in 10yr US Treasuries, supporting an appreciation of the global dollar. Geopolitical tensions may maintain energy prices high and global risk appetite low. While high frequency activity indicators in the US continue to surprise to the upside, activity in China appears to have stabilized at a lower level amid fine-tuning of stimuli. As such, the external impulse for the Chilean economy is expected to remain contained.


 

CLP bears the brunt, as expected. The combination of tighter global financial conditions and narrowing interest rate differentials (actual and projected) has taken a toll on the CLP, which has had a nominal depreciation of roughly 5.8% since the September 5 policy meeting, the largest depreciation among EM currencies. Even though two-year breakevens remain close to 3%, a weaker CLP alongside higher global oil prices raise risks of a slower disinflation path.

 

No surprises on the domestic activity front: While monthly activity dynamics have been volatile, reflecting transitory shocks, the overall trend broadly supports the BCCh’s view that the economy has bottomed out. A larger-than-expected sequential rise in the IMACEC monthly GDP proxy in July (prior to the September cut), led by rainfall-driven electricity generation, was followed by a significant monthly contraction in August due to a brief teachers’ strike. Core activity measured by the non-mining IMACEC contracted by 0.6% QoQ/SA (vs. -2.5% in 2Q23). 


 

 

Increasing slack in the labor market, as expected: The unemployment rate for the August quarter rose to 9.0%, +1.1pp above the same quarter last year, a larger adjustment than was seen in 2Q23 (0.7pp). On a seasonally adjusted basis, the unemployment rate ticked up by 40bps from 2Q23 to 8.8%, as employment fell 0.1% MoM/SA, the first negative number seen since Nov-22 (and slowed to +0.3% QoQ/SA; average quarterly employment growth during 2015-19 was 0.5% QoQ/SA). Separately, the labor force increased by 0.1% MoM/SA (0.8% QoQ/SA; 0.9% in 2Q23). Job growth over twelve months (1.7% YoY; 2.2% in 2Q23) was driven by informal job posts (1.9% YoY). Labor demand remains weak. As such, labor market dynamics are unlikely to provide inflationary pressures.


 

Cumulative downside surprises to core inflation. Two inflation prints have been published since the September policy meeting. The August print surprised to the downside, while September came in somewhat higher, mainly driven by volatiles. The September IPoM forecasted an average headline CPI of 5.8% in 3Q23 (actual 5.6%), and 7.8% for core inflation (actual 7.5%). At the margin, inflation accumulated in the quarter reached 3.5% (SA, annualized; 2.6% in 2Q23), while core inflation fell to 2.9% (SA, annualized; 5.6% in 2Q23). Importantly, survey-based inflation expectations remain anchored at the policy horizon, while one-year ahead expectations have not changed materially since September.


 



 

In this context, we expect the BCCh to cut the policy rate by 75bps to 8.75% and signal a moderation in the pace of cuts going forward. With a 75-bps cut, the one-year real exante policy rate would fall from 6.1% to 5.4%, still well above the BCCh’s neutral rate range of 0.5%-1.0%. Higher Treasury yields, and oil prices may translate into higher terminal rates, hence more restrained cycles (possibly meaning a 2024 yearend rate above our current 5.0% call).


Andrés Pérez M.

Vittorio Peretti

Ignacio Martinez Labra