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Barclays Raise Year-End Interest Rate Forecast To 5.5%, from 4.5%

CHILE
  • After the hawkish policy statement and monetary policy report this week, Barclays now expect just one more 25bp cut from the BCCh this year, bringing the policy rate to 5.50% at year-end (vs. 4.50% expected previously). They think this will likely be implemented at the next monetary policy meeting on July 31. However, this may be more of a pause than an end to the cycle, as they expect the BCCh to resume easing at some point next year once the Fed starts to cut rates.
  • Now that rates are closer to neutral levels, and the June IPoM showed that the BCCh will proceed with caution in the last stage of the cutting cycle, carry erosion is less of an issue. Barclays see more room for the CLP to outperform other low-yielding currencies in this environment, aided by strong fundamentals, favourable terms of trade and high copper prices.
  • In rates, the market's reaction to a more cautious BCCh looks fair. Barclays expect the front end to keep trading between 4.5% and 5%, depending on US data and a cautious non-continuous end to the cycle, at least until there is more clarity about the effect electricity hikes have on inflation.
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