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MNI Chile Central Bank Preview - July 2022
Executive Summary
- The BCCh used the June statement to signal further tightening in July, signalling that a rate hike would be of a smaller magnitude than the previous 75bps.
- As such, the majority of surveyed analysts see a 50bp hike of the overnight rate target to 9.50% on Wednesday.
- However, stubbornly high inflation combined with a steep deterioration of the Chilean peso has prompted calls for bolder action.
Click to view the full preview: MNI BCCh Preview - July 2022.pdf
Central Bank Do Not Plan On Intervening Despite Rapid CLP Selloff
The Chilean peso has been under severe pressure since the June meeting with USDCLP breaching 1,000 in recent days, marking record highs for the pair. Analysts including Goldman Sachs have cited the currency depreciation as one of the main reasons for their above consensus prediction of a 75bp hike. While Santander highlight that movements in the currency, explained by the fall in the price of copper, could have an inflationary effect in the short term, but they note this tends to be deflationary in the medium term, as lower terms of trade negatively impact activity.
More recently, the central bank stated that they do not see foreign exchange intervention as necessary at the moment with markets able to absorb shocks adequately. Following this, JPMorgan noted that the balance has now tilted towards a 100bp rate hike as the most likely decision this week. 
Following the June meeting, monthly CPI readings of +1.2% in May and +0.9% in June have resulted in annual headline CPI reaching 12.5%, even further above the BCCh target. The June reading represents the highest print since 1994. Indeed, in the latest central bank economist survey, published on July 12, the 2022 year-end inflation rate forecast was adjusted to 11% versus 8.9% before the June meeting. Furthermore, with predictions for year-end 2023 CPI also being adjusted upwards to 5.1% from 4.4%, this provides more evidence of a deterioration in medium-term expectations.
The inflationary pressures certainly add pressure to the latest BCCh guidance on decelerating the pace of rate hikes. The latest central bank economist survey expects rates to be raised by 50bp to 9.50% on Wednesday, however, the 2022 year-end rate forecast has been raised to 10.00% from a prior estimate of 9.50%.
Why MNI
MNI is the leading provider
of intelligence and analysis on the Global Fixed Income, Foreign Exchange and Energy markets. We use an innovative combination of real-time analysis, deep fundamental research and journalism to provide unique and actionable insights for traders and investors. Our "All signal, no noise" approach drives an intelligence service that is succinct and timely, which is highly regarded by our time constrained client base.Our Head Office is in London with offices in Chicago, Washington and Beijing, as well as an on the ground presence in other major financial centres across the world.