MNI Chile CB Preview: Dec 25 - Rate Cut Seen As CPI Fears Ease
Executive Summary
- The BCCh is widely expected to deliver a 25bp reference rate cut to 4.50% on Tuesday after benign CPI data over the last two months have eased policymakers concerns about persistent inflation pressures.
- Headline inflation has fallen back within the central bank’s 2-4% target range over the period, while the policy relevant ex-volatiles measure has also declined to below the central bank’s latest projections.
- Recent survey data suggest that a rate cut this week will be followed by a final 25bp move next year, bringing the policy rate down to around its neutral level.
At the previous monetary policy meeting in October, the central bank Board continued to strike a cautious tone, noting that inflation and activity had evolved as expected, but that risks to the inflation outlook remained. This, it said, warranted waiting to gather more information before continuing the process of reducing the monetary policy rate further towards its neutral range of values. Since then, the last two CPI inflation prints have surprised to the downside, with both the headline and core rates now comfortably inside the central bank’s target range, paving the way for a resumption of rate cuts this week.
In October, headline CPI inflation fell by 100bp to 3.4% y/y, its lowest level since April 2021, helped by favourable base effects as last year’s electricity price hike dropped out of the annual comparison. Meanwhile, the BCCh’s preferred ex-volatiles measure also declined from 3.9% y/y to a 15-month low of 3.4%. These data were followed by slightly softer-than-expected November CPI figures as well, which showed both the headline and ex-volatiles CPI measures unchanged at 3.4% y/y. Importantly, this leaves core inflation tracking below the central bank’s forecasts from its September monetary policy report. Given that core inflation was running close to 4% through Q3 this should be enough to assuage BCCh concerns about persistent core CPI pressures. That said, sticky core services inflation still warrants some caution, with the improvement in core inflation recently being driven by a further moderation in core goods prices.
