Andrés Pérez M., Vittorio Peretti & Ignacio Martinez Labra
10/02/2023
At the January meeting all board members agreed that the inflation convergence path towards the 3% target had not consolidated fully, thus the only plausible option was to hold rates at 11.25%. The Board recalled that this decision was in line with the clear message at the previous meeting that the policy rate will remain at the current level until the macro scenario showed explicit signs of inflation converging. The Board believed that the domestic macro scenario was broadly in line with the December IPoM, although both activity and inflation had moderately surprised to the upside. However, the CLP appreciation was the most significant change since the IPoM, but its implications on the disinflation path were not yet clear, as reflected by the fact that inflation expectations had not shifted significantly, standing still above 3% over the two-year horizon. A further analysis of this effect will be discussed in the April IPoM. Lastly, the risks surrounding the inflation outlook continued to be significant, with a marked asymmetry regarding costs in case inflation rises.
One Board member favored considering the option of a small rate decrease at the meeting. This Board member believed such a move could be justified considering the CLP appreciation, and overall trends that suggested a disinflation process ahead. Additionally, this Board member pointed to a high one-year ex-ante real rate (6%). Nonetheless, the rest of the Board reaffirmed that, for the time being, the option of reducing the policy rate was not valid. In their view, in the current scenario, the convergence of inflation relied significantly on the credibility of the Central Bank’s ability and commitment to the 3% inflation target over the two-year horizon. As a result, the Board agreed that the best way to mitigate this risk was to be more cautious regarding the start of the rate cut cycle.
While inflation and expectations have generally trended down over the last quarter, and the CLP has accumulated a 22% appreciation with respect to the dollar since its October low, we expect the Central Bank to wait until mid-year (when inflation is expected to be within single-digit terrain) before starting an easing cycle that would take the policy rate to 7% by year end, with further cuts into 2024.
Joao Pedro Resende
Andrés Pérez M.
Vittorio Peretti
Ignacio Martinez Labra