MNI Chile Central Bank Preview – Jan 2023: Easing Cycle Approaching
The BCCh is widely expected to keep the policy rate unchanged at 11.25%.
- The BCCh is widely expected to keep the policy rate unchanged at 11.25%.
- Despite a very gradual softening of CPI data, headline inflation continues to track at 12.8% Y/y which many believe should prompt the committee to maintain rates at present levels.
- However, the majority of analysts are predicting the start of the easing cycle in Q2 2023 and the large gap between the January and April policy decisions, highlights the importance of this month’s statement.
- The committee’s rhetoric will be carefully scrutinised for clues as to when potential rate cuts may begin, as well as whether current market pricing for the rest of the year’s easing appears adequate.
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Contracting Economic Activity May Bolster Case For Easing
The latest economic activity data showed a 0.8% contraction for November, bringing the annual reading down to -2.5% Y/y, adding confirmation that the stance of the central bank has contributed to considerably slowing down an overheated economy. The latest BCCh economist survey held the 2023 year-end GDP projection steady at -1.5%. Alongside these projections, economists and traders are currently predicting an unchanged decision on Thursday. However, a 50bp rate cut is then expected at the next meeting with the key rate seen falling to 7.00% in 11 months.
It is worth highlighting that the next BCCh policy meeting does not fall until April 04. If indeed, it is the central bank’s intention to cut rates at the April meeting, the January statement could be used to signal the committee’s intention to do so or indeed push back against these current market expectations.
Furthermore, in the latest central bank economist survey, published on January 10, 2023 & 2024 year-end CPI forecasts were held steady at 5.0% and 3.3% respectively, but this does represent an improvement from before the December meeting from 5.10% and 3.5% respectively. While remaining above the central bank’s target, the improvement may indicate early signs of an anchoring of inflation expectations.
Additional factors that may contribute towards an improvement in inflation dynamics include the sizable appreciation of the Chilean peso, the ongoing decreases in international food prices as well as the expected decline in non-mining GDP in 2023.