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Morgan Stanley on BCCh: Terminal rate of 6.00% By Q2’22

CHILE
  • MS economists expect the BCCh to deliver another 125bp hike to 4.00% in the December decision, in line with consensus and slightly above market pricing.
  • Although recent remarks by policy-makers and the latest guidance from the minutes hint that the baseline scenario for December should be around 100bp (to 3.75%), MS think they will end up delivering more amid the recent further de-anchoring of inflation expectations as well as a string of upside surprises on growth, inflation and the current account deficit releases.
  • They expect the BCCh to take rates to a terminal level of 6.00% by 2Q22 to re-anchor inflation expectations, This is above market pricing of 5.50% at the end of 2Q22.
  • For 2H22, MS expect the BCCh to start an easing cycle as soon as 4Q22, given our economists' call for a domestic demand recession in the back half of the year. They see the BCCh policy rate closing 2022 at 5.75%, in line with market pricing.
  • In local rates, we remain short 10-year inflation breakevens in swaps, targeting 3.10%, with the BCCh signalling it will hike to neutral this coming week and with 2022 hikes likely to push the policy rate further into restrictive territory.
  • Fading fiscal stimulus mixed with tight monetary policy and an uncertain business environment ahead of the Constitutional Referendum should continue to weigh on long-end inflation pricing. A reversion in US breakevens should also support the trade.
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