MNI Chile Central Bank Preview – Sep 2022: Hawkish Stance Still Required

Executive Summary:

• The BCCh is expected to continue with its tightening cycle at the September meeting, with surveyed analysts currently split between a 50bp or a 75bp increase to the monetary policy rate.
• Upward pressure on inflation continues to warrant maintaining a hawkish stance, however, the recently implemented FX intervention program, diminishing growth profile and the outcome of the vote on a new constitution may somewhat ease the pressure on the central bank board.

Click to view the full preview: MNI BCCh Preview - September 2022.pdf

FX Intervention Significantly Boosts Chilean Peso

Since the last central bank meeting on July 13, the BCCh announced a $25 billion intervention in the foreign exchange market to support the peso after it fell to a record low. The program is expected to run until September 30. Central bank officials have noted that the program has provided stability for the Peso with BCCh President Rosanna Costa noted the bank’s action had “reduced market distortions and lowered volatility”.

Growth data has been underwhelming with four consecutive negative prints to the monthly economic activity index and the latest reading for July registering at -1.1%, below consensus expectation for just a 0.5% decrease. This alongside the growing concerns to global growth amid major central banks embarking on more aggressive tightening cycles could also add credence to the argument for a smaller adjustment to the MPR this week.

However…The Inflation Outlook Has Continued To Deteriorate

Following the July meeting, a monthly CPI reading of +1.4% for July has resulted in annual headline CPI reaching 13.1%, even further above the BCCh target. The July reading represents the highest print since 1994 and is expected to increase further to 13.8% in August, according to the median estimate of the latest Bloomberg survey.

Indeed, in the latest central bank economist survey, published on August 10, the 2022 year-end inflation rate forecast was adjusted to 12.3% versus 11% before the July meeting. Furthermore, with predictions for year-end 2023 CPI also being adjusted upwards to 5.5% from 5.1%, this provides more evidence of a deterioration in medium-term expectations.

Alongside the worsening inflation dynamics, Chile’s current account deficit swelled to 8.5% of gross domestic product in the second quarter, the highest for at least two decades and significantly worse than expectations. The deficit, alongside the known lingering political uncertainties, certainly have the potential to weigh on the Chilean Peso over the medium term, especially once the intervention program expires and these dynamics may prompt the BCCh to continue with its 75bp hiking pace. For reference, in both the central bank economist and traders survey, the key rate is expected to be increased by 75bps at this week’s meeting to 10.50%.