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JPMorgan On Chile Monetary Policy:  Rate To Reach 8.5% in 3Q22

CHILE
  • The distribution of risks amid the current central bank strategy prompts JPMorgan to revise higher the terminal policy rate in their modal scenario. JPM now call for the policy rate to reach 8.5% in 3Q22 (before 7.75% in 2Q22). Importantly, this level would not be consistent with new pension fund withdrawals or additional fiscal accommodation. Such scenario would merit a higher policy rate level. They also revise the policy rate for 2023 and set a new level for 4Q23 at 6.0%, above the corridor ceiling by then
  • BCCh reaction function has changed with the weight on inflation expectations still above that of output gap, yet not as high as in prior months. Thus, the central bank will likely continue tightening monetary conditions via policy rate hikes, though more gradually and by less than what the market had priced in. The global negative supply shock the catalyst for the relatively dovish report tone.
  • Not only did the Board hike the policy rate less than what expected and priced in yesterday, but the forward guidance now shows a ceiling for the policy rate of 8.50% in 2H22 (well below what the market had priced in) and a floor of 6.3% for 4Q21.
  • In JPMorgan’s view, while the recently appointed President Costa emphasized the Board will do what’s necessary to secure inflation convergence to its 3% target by the policy horizon, the actions and narrative conveyed in the report suggest the Board may not be walking the talk.
  • The timing in conveying the message embedded in the policy report may prove risky. If realized inflation proves higher and/or more persistent than what the central bank’s baseline assumes, it could further contaminate expectations, eventually forcing the central bank to validate a higher policy rate than what it envisions.
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