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Morgan Stanley Expect Terminal Rate Of 11.75% By December

CHILE
  • Morgan Stanley economists see the BCCh delivering a 50bp hike. With inflation still elevated and amid renewed currency weakness, policymakers are likely to once again move towards the upper bound of the rates corridor laid out in the latest IPoM.
  • MS expect a terminal rate of 11.75% by December, with risks skewed to the upside against an elevated likelihood of further currency weakness driven by a lingering balance-of-payments imbalance combined with strong external risks. Current market pricing suggests a terminal rate closer of 11.50%, 25bp below their economists' expectations.
  • They keep a dislike stance on CLP and stay short CLP/MXN, as the current account remains near the record-wide level of -8.5% of GDP, with the imbalance compounded by virtually muted FDI flows over the last year or so. Despite additional reserve buffers provided by the IMF via a US$18.5 billion flexible credit line, together with roughly US$7.7 billion in Treasury assets, the current account adjustment is proceeding slowly, heightening risks of further currency weakness.
  • In local rates, the market is looking ahead towards the end of the hiking cycle. 2s10s in CLPxCAM has twist steepened meaningfully in the last week, driven by a continued rally in the 2-year rate and a sell-off in the 10-year rate. The 10-year sell-off comes after the government announced that spending would increase by just over 4.0% in 2023. The latest economic activity print suggests that the growth slowdown is not as sharp as expected by economists' consensus.
  • If the BCCh continues to soften its rhetoric on restrictive policy, the curve could continue to see further steepening for now, but if currency weakness persists, it could result in a marginally more restrictive shift in rhetoric from the BCCh later on.
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