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Barclays: BCCh Likely To Remain Hawkish, Focus On Policy Corridor

CHILE
  • Barclays economists expect the BCCh to hike 175bp on March 29, to bring the policy rate to 7.25%, with a risk of 200bp. Market consensus appears to be in line, as strong January inflation, hawkish minutes, elevated 1y-2y inflation expectations and a hawkish new president all point to the continuation of the front-loaded cycle.
  • Pricing in Camara also points to a fast increase of rates, to 9% in the next few months. We think there is little room for surprise on the March hike, besides the fine-tuning of the size of the increase. The BCCh has been aggressive at this tightening cycle, and the market pricing of a sizable increase in rates for the coming meetings with upside risks appears reasonable.
  • Instead, focus will be on the monetary policy rate corridor to be released with the Monetary Policy Report. The Camara curve pricing has tended to stay in the upper half of the corridor, and the market will look for signals about the potential peak rate and the timing for the start of cuts.
  • Barclays find that market pricing and traders’ expectations of a terminal rate close to 8.5-9% is in line with the upper range of the corridor. As such, they would not expect major repricing when the BCCh mentions the new corridor at the policy statement and publishes it at the MPR the day after.
  • The language of the statement can also be examined for clues about the path of rates. A dovish surprise could come if the central bank highlights the below-expectations January activity data. Any mention may be interpreted as the BCCh’s being more cautious about tightening policy.
  • On the hawkish side, besides a large unanimous hike, the statement could have no mention of softer activity data, highlighting upside risks to inflation, and the monetary policy corridor showing rates staying high for longer (ie, limited room for cuts in 1y horizon). The market has already begun to price out some of the fast cuts, and the 1y2y Camara spread has corrected somewhat from recent lows.
  • The CLP continues to be favored by high interest rates, a better outlook for metal prices and stable risk sentiment. Barclays think an extension of the front-loaded hiking cycle should continue to support the currency, and they remain recommending long CLP through a USDCLP seagull.
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