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JPMorgan on Chile/BCCh: Base Case Assumes 125bp Jan Hike

CHILE
  • President-elect Boric is expected to unveil this week the Cabinet that would assume office on March 11. The composition of the cabinet, particularly the identity of the finance minister, should provide relevant information to gauge whether the administration will further moderate its fiscal agenda, or instead stick to its ambitious 5% of GDP increase in structural expenditure over a 4-yr horizon.
  • Beyond its medium-term relevance, these early signals on the fiscal stance ahead will also prove relevant for the current monetary policy cycle, as agents have already started to expect higher long-term inflation on a more lax fiscal stance.
  • This adds upside pressure on the level of the neutral policy rate, and thus, on the effective rate level the Board may deem necessary to secure convergence of inflation to its target in the policy horizon. This risk is despite the hefty deceleration in economic activity expected for 2022 and 2023.
  • JPM’s current base case assumes the CBC hiking the policy rate by 125bp on January 26 to 5.25%, and the risk is skewed to a higher rather than lower rate given inflation performance in December.
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