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CHILE: Itaú Expects BCCh To Continue Cutting To 4.5% In H125

CHILE
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  • Despite the increase in one-year inflation expectations, amidst large electricity price hikes, expectations in the relevant two-year horizon remain anchored at the 3.0% target. In this context and considering the weakness in domestic activity and an imminent Fed easing cycle, Itaú expects 25bp rate cuts at the remaining two meetings of the year, which would take the policy rate to 5%. They see rates reaching 4.5%, the upper bound of the neutral range, during 1H25, with the risks tilted toward additional cuts next year.
  • The surprisingly large rebound in the monthly GDP proxy in July refutes the downside bias Itaú had held on their 2.5% 2024 GDP growth call. They still see growth slowing to a near-potential 2.1% next year. On inflation, they maintain their 4.5% year-end forecast, but risks remain tilted to the upside. Next year, they see inflation converging to 3.3% by year-end, supported by a stronger CLP (to 850 per dollar), lower oil prices and soft domestic demand.
  • Itaú says that the transitory nature of the supply shock is key to permitting the continuation of the rate-cutting cycle. Pauses could take place if a scenario of global risk aversion is reflected in excess exchange-rate volatility. Itaú says that low interest-rate differentials with the US set a high bar for the BCCh to implement a large reserve accumulation program in the near term.
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  • Despite the increase in one-year inflation expectations, amidst large electricity price hikes, expectations in the relevant two-year horizon remain anchored at the 3.0% target. In this context and considering the weakness in domestic activity and an imminent Fed easing cycle, Itaú expects 25bp rate cuts at the remaining two meetings of the year, which would take the policy rate to 5%. They see rates reaching 4.5%, the upper bound of the neutral range, during 1H25, with the risks tilted toward additional cuts next year.
  • The surprisingly large rebound in the monthly GDP proxy in July refutes the downside bias Itaú had held on their 2.5% 2024 GDP growth call. They still see growth slowing to a near-potential 2.1% next year. On inflation, they maintain their 4.5% year-end forecast, but risks remain tilted to the upside. Next year, they see inflation converging to 3.3% by year-end, supported by a stronger CLP (to 850 per dollar), lower oil prices and soft domestic demand.
  • Itaú says that the transitory nature of the supply shock is key to permitting the continuation of the rate-cutting cycle. Pauses could take place if a scenario of global risk aversion is reflected in excess exchange-rate volatility. Itaú says that low interest-rate differentials with the US set a high bar for the BCCh to implement a large reserve accumulation program in the near term.