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Morgan Stanley: Expect BCCh To Signal That Data Dependent Cuts Are Coming

CHILE
  • Morgan Stanley economists expect the BCCh to keep the policy rate on hold in the December 2022 decision, with the main highlight being the statement and more importantly the Monetary Policy Report (IPoM) that is released the day after. The focus from market participants will largely be on communications, centred on whether policymakers open the door for cuts as soon as January 2022, as roughly a 50bp cut is priced for January.
  • While their economists think the latest inflation dataflow bears risks to their call that the BCCh will only start cutting in May, they do not expect the central bank to clearly guide that cuts will start in January.
  • Instead, MS expect the bank to signal that cuts are coming, but that data will determine when to start. This should provide more support for the currency. The 880 target on their short USD/CLP recommendation has been reached, however, MS will wait for more clarity from the central bank to assess the risk/reward in extending the target versus closing the trade at current levels.
  • The upside surprise their economists expect for November's inflation print should help to guide markets closer to their expected path. For this reason, MS remain paid 9m CLPxCAM, targeting 10.75%. The cautious approach from the BCCh also suggests a further anchoring of the 5y5y point closer to the estimated long-run neutral rate (3.50%). MS stay received the 5y5y in CLPxCAM, targeting 4.25%.
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