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Chile Monetary Policy October 2023

Chile: Central Bank cuts rates by less than expected in October

On 26 October, the board of the Central Bank of Chile (BCCH) cut the policy interest rate from 9.50% to 9.00%, less than the 75 basis-point cut expected by the market and less than the 75 basis-point cut carried out in September. In addition, the Bank halted its program designed to replenish FX reserves, in light of the recent weakening of the peso.

The decision to continue to cut rates was driven by the notable falls in headline and core inflation in recent months, as well as by muted economic activity. However, the 9% depreciation of the peso since the previous meeting in September, together with the notable decline in local asset prices since July, likely persuaded the Bank to opt for a smaller cut.

The Central Bank did not provide explicit forward guidance, though our Consensus is for ongoing rate cuts this year and next as inflation likely continues to trend down towards the Central Bank’s 3.0% target. Continued peso weakness is an upside risk to the policy rate.

On the outlook, Itaú Unibanco analysts said: “Scrapping guidance suggests we are likely to see a reassessment of the policy corridor, that balances higher inflation risks stemming from a weaker CLP and higher oil prices, with weaker activity. Rate cuts are likely to continue in December, with the pace contingent on global conditions.” Goldman Sachs’ Sergio Armella commented: “We expect the MPC to adopt a cautious approach to the easing cycle going forward, turning more data dependent and easing to the extent that progress on the disinflationary front allows while taking the challenging external backdrop and the exchange rate into consideration. At this juncture, we see another 50bps cut in December, for an end-of-year policy rate of 8.50%, as the base case.”

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