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Chile Monetary Policy July 2023

Chile: Central Bank slashes rates in July

At its 28 July meeting, the board of the Central Bank of Chile (BCCh) decided to cut the monetary policy rate to 10.25% from 11.25%, a larger cut than markets were expecting.

The decision was driven by both headline and core inflation falling faster than the Bank expected in June. Moreover, two-year market inflation expectations sit at the Central Bank’s 3.0% target, and the economy is losing steam, providing the leeway to cut rates.

Forward guidance was dovish, with the Bank stating that the policy rate “will accumulate a somewhat stronger reduction than was considered in the [June] Monetary Policy Report’s central scenario”. The Consensus is for another large rate cut at the Bank’s next meeting in late-September, with over 200 basis points of additional loosening penciled in by year-end. Our analysts are likely to revise down their forecasts for the end-2023 policy rate ahead in light of the July meeting.

On the outlook, Itau Unibanco analysts said:

“The communiqué explicitly states that cuts in the short term should be of a similar magnitude as recent surveys […] In this context, we expect the yearend rate to come in well below the 8.75% signaled in the June minutes, and closer to the 7% floor of the IPoM’s corridor.”

Goldman Sachs analysts take a similar stance:

“The decision conveys the signal of a significantly more dovish inclination […] Risks to our previous 8.50% end-of-year policy rate are undoubtedly one sided and could see the 8.25%-7.75% range as plausible.”

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