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Chile Monetary Policy December 2023

Chile: Central Bank cuts rates in December; signals further cuts ahead

On 19 December, the board of the Central Bank of Chile (BCCH) cut the policy interest rate (MPR) from 9.00% to 8.25%.

The decision to continue to cut rates was due to sustained falls in headline and core inflation in recent months, the strengthening of the peso since the Bank’s last meeting in October, and the Bank’s belief that core inflation would return to the 3.0% target in H1 2024. In addition, the Federal Reserve’s shift to a more dovish stance at its December meeting—in which the U.S. Central Bank openly signaled rate cuts in 2024—likely provided the BCCH with more room to cut.

The Central Bank stated that “the convergence of inflation to the target will require further cuts in the MPR”. This is in line with our panelists’ projections: Our Consensus is for more than 300 basis points of cuts by end-2024, with a spread among panelists’ end-2024 forecasts of 200 basis points.

On the outlook, Itaú Unibanco analysts said:

“Less restrictive global financial conditions and a more dovish Fed will see the BCCh try to take the policy rate as quickly as possible towards the neutral rate. The output gap is broadly closed, and inflation expectations are anchored pointing to a monetary policy that remains too contractionary. We expect the Board to make the most of the room the financial markets provide it and cut rates by as much as it sees feasible in coming months, including another 75-bps cut in January.”

Goldman Sachs’ Sergio Armella struck a similar tone:

“The central bank was clear in signaling that it was the external backdrop that led them to slow the pace of cuts at their October meeting. […] if the FOMC cuts its policy rate as soon as in March as our US Economics team expects, we believe the MPC could feel comfortable continuing with an aggressive easing cycle.”

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