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Itaú Expect BCCh To Step Up Pace of Easing to 100bp Next Week

CHILE
  • The BCCh is due to announce its latest interest rate decision next week and Itau expect the central bank to step up the pace of easing with a 100bp cut to 7.25%, with risks tilted to a larger move, rather than persisting with a 75bp adjustment. This is broadly in line with market expectations, with the latest BCCh analyst survey showing a slightly larger share of analysts (39.5% vs. 37.2%) expect a 100bp move rather than 75bp.
  • Itaú believe that the recent large downside surprise to inflation, the decline in inflation expectations to or below the 3% target, weak economic activity and orderly domestic financial conditions justifies another large cut, especially with the policy rate still well above neutral.
  • CPI inflation fell to 3.9% y/y in December, from 4.8%, and inflationary pressures at the margin are near target levels. Itaú note that although the CLP has weakened since last month, it has not so far had an impact on inflation expectations. Large recent dollar sales by the MoF also provide some resistance to further CLP weakening.
  • Activity is evolving broadly in line with BCCh’s outlook, but Itau see downside risks to the sequential improvement. The positive output gap is expected to have closed at end 2023 and BCCh expect it to remain negative on a 2-year horizon.
  • Itau expect a frontloaded easing cycle to continue in 2024, ending the year at 4.5%, close to nominal neutral levels.
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