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JPMorgan on Chile Central Bank: Now Forecast Monetary Policy Rate at 2.0% By Dec '21, Up From 1.5%
- In 2H21 the CBC faces a very particular challenge: to manage an unsustainable acceleration in private sector consumption amid both direct fiscal transfers and private pension fund withdrawals.
- While temporary in nature, the economy is to experience an overheating state for the remainder of the year, what should prompt the CBC to accelerate the removal of the monetary impulse so to avoid overdoing tightening in 2022.
- Even if their base-case scenario does not contemplate a fourth pension withdrawal, JPM believe that against the additional fiscal thrust deployed by the government, the CBC should respond by altering the convergence path to positive real monetary interest rates.
- Headline and realized inflation have accelerated quicker than the CBC had envisioned and inflation expectations have been monotonically moving higher. Together with the currency weakness, the aforementioned congressional discussion on additional pension fund withdrawals, as well as the market repricing of the Fed reaction function ahead, suggests additional pressures on headline inflation.
- In all, we believe the CBC will end up adding 50bp on top of the 75bp we had previously entertained by year-end. That would imply the policy rate at 2.0% by December, as compared with 1.5% before. Note we are now assuming the CBC will bring forward by a quarter the convergence of the ex-ante real rate to null, which we expect to happen by end-2022.
- In their base case JPM assume the CBC is to hike 25bp this month, and signal acceleration to 50bp in the last two meetings of the year. That acceleration would allow the CBC to maintain degrees of freedom in 2022 to make adequate the pace of additional tightening at a very gradual 25bp per quarter.
- They thus maintain the forecast for the policy rate at 3% by December 2022, consistent with a null real ex-ante rate.