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Morgan Stanley: Board's Reaction Function More Hawkish Than Anticipated

CHILE
  • The front-loading work done so far amounts to 500bp of hikes since July 2021, one of the strongest tightening cycles in Chile's monetary policy history.
  • The statement remained very hawkish: Similar to the past few decisions, policy-makers maintained a very hawkish tone by once again flagging: 1) De-anchored inflation expectations; 2) Accelerating core inflation; and 3) The strong growth environment. They made it clear that incoming data were surprising to the upside versus their latest projections.
  • MS think that this report shows that policy-makers' reaction function is even more hawkish than they were anticipating. Against this backdrop, and taking into account their cautious CPI forecasts, MS now expect rates to peak at 7.50% by June.
  • Specifically, MS see policy-makers hiking by 125bp in the March and then see the BCCh moderating to a 50bp clip by May, at which point they expect both CPI and CPI expectations to show signs of cooling off as growth shows signs of weakening) and closing the hiking cycle with a 25bp move in June.
  • MS stay short 10y BE - they note that inflation upside remains a risk in the very near term (the next 3-6 months), likely to keep shorter breakeven tenors more volatile, and so they prefer to be short breakevens in the 10-year sector of the curve.
  • MS also continue to recommend receiving 2y CLPxCAM versus paying 2y US IRS. The near-term hawkishness should also keep supporting the currency. They stay long CLP versus MXN as a play on divergent valuations and declining policy uncertainty in Chile, targeting 2.60 with a stop at 2.40. They also remain long vol in MXN versus CLP via long 6m MXN/short 6m CLP straddles.
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