Andrés Pérez M. & Vittorio Peretti
In a unanimous decision, the Central Bank’s Board expectedly maintained the policy rate at 11.25% and signaled that rates would remain at the current level until the process of correcting the current macroeconomic imbalances consolidates and inflation is converging back to the 3% target. In our view, this signaling confirms the likelihood of a rate cut in the very short-term - as incorporated in market implied rates - is low.
Global inflationary pressures remain high and expectations point to a prolonged monetary policy adjustment abroad. Global financial market volatility remains high, and markets recently moved to a risk-on mode. Domestically, long-term interest rates have dropped by over 140bps since the last meeting in October, and the CLP has appreciated 5%. Loan dynamics remain suppressed across all segments.
The required activity adjustment is underway. Non-mining activity fell 0.8% qoq/sa in 3Q, while posting a further 0.4% mom/sa drop in October. With the normalization of liquidity levels, a dent to real wages, widespread consumer pessimism and weak employment growth, consumption is correcting down. Gross fixed investment has surprised to the upside, but driven by specific factors (renewable energy), with the expectation that it should soften ahead.
The disinflation process advanced in October, with the slowdown in core goods the key driver. Medium-term inflation expectations remain de-anchored.
All eyes on the November CPI print Wednesday morning. The National Statistics Institute will publish the November CPI, with breakevens implying a 0.44% MoM increase, the BBG median at 0.5%, and our call at 0.6% MoM. A reversion of the downside surprise in October (0.5% increase, with BBG median at 0.9%) would support the current policy guidance.
Also on Wednesday morning, the central bank will publish the 4Q Monetary Policy Report (IPoM). Compared to September, we expect the updated report to reflect a more gradual activity slowdown, along with a wider current account deficit. Meanwhile, inflation has evolved broadly in line with expectations. The report will likely raise GDP growth above the current 1.75-2.25% range for this year. The inflation trajectory to 3.3% by the end of next year is unlikely to be adjusted significantly. Regarding rate guidance, cuts are unlikely to be signaled before 2Q23. The report will also update structural parameters, including potential growth (downside revision risk to the 2.9% mid-point) and the real neutral rate (likely upside adjustment to the current 0.25-0.75% range).
Amid heightened volatility, raised uncertainty and large imbalances, we expect the central bank to be cautious going forward. While the one-year ex-ante real rate in our view is currently around 6.5% (and 8% using the central bank’s 3Q estimate), the board will wait for inflation to consolidate its fall to the 3% target, for the re-anchoring of medium-term inflation expectations (currently at 3.5%) before easing monetary policy. We see a policy rate of 7% by the end of 2023, with cuts starting mid-year.
Joao Pedro Resende
Andrés Pérez M.