MNI BCCh Preview - Dec 2024: 25BP Cut Expected, FX Risks Rise

Executive Summary:

• Latest activity and inflation data have evolved broadly in line with expectations, consistent with the BCCh cutting the overnight rate by 25bp to 5.00% in December. This action would follow prior guidance of continuing “to reduce the policy rate towards its neutral level”.
• Central bank economist and trader surveys corroborate this sentiment and are then forecasting the committee to keep the key rate unchanged in January.
• Attention will swiftly turn to Wednesday’s release of the December Monetary Policy Report (IPoM), where domestic and external developments, namely CLP depreciation and higher core rates, may lead the BCCh to adopt a more cautious forward guidance. This would potentially allow for market rate expectations for the end of the easing cycle to consolidate around the upper bound of the neutral rate range at 4.5%.

Click to view the full preview: MNI BCCh Preview - Dec 2024.pdf

BCCh Still Expects Cost Pressures to be Transitory

CPI data have been mixed since the previous monetary policy meeting, with inflation surprising to the upside in October, before moderating broadly as expected again in November. Speaking after the October data, BCCh Governor Rosanna Costa said that although inflation was higher than the central bank expected, the base case on inflation hadn’t changed and she still expects costs pressures in the economy, following the on-going electricity price hikes, to be transitory.

Inflation Expectations Remain Well Anchored

Looking ahead, analysts’ inflation expectations remain stable, with the latest BCCh economist survey revealing that inflation is still seen ending this year at 4.5% and next year at 3.5%, unchanged from the previous survey. Importantly, longer-term inflation forecasts have also remained stable, with the end-2026 CPI expectation still anchored at 3.0%.

USDCLP Rises to Fresh 2-Year High, Technical Bull Cycle Intact 

USDCLP has risen nearly 5% since the October 17 policy meeting, leaving the pair roughly 11.5% above the September lows. The most recent sharp downswing for the peso will likely attract the attention of the central bank, wary of the potential impact on the trajectory for inflation expectations.