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SocGen: Risk To Terminal Rate Forecast Remain Biased To The Upside

CHILE
  • SocGen foresee the following possibilities for BCCh tightening this week: +100bp (with 25% probability), +75bp (45%) and +50bp (30%). Their terminal policy rate forecast in December 2022 is 11.75%, meaning the tightening cycle could well continue beyond October.
  • At this point in time, they see risks skewed to the upside for rates to rise beyond their forecast of 11.75%. SocGen still expect rate easing to begin in 2Q23, with risks to this outlook broadly balanced at this stage.
  • Since the September meeting, both inflation and the economic activity data for August surprised to the upside again. The overheating economy is slowing, but not as fast as many commentators continue to expect. The inflation moderation likely began in September, but the pace of moderation could still fail to satisfy the hawks in the BCCh board.
  • Current inflation is yet to show a declining trend. The CLP remains on a volatile and downward trajectory amid dollar strengthening and Chile’s very weak external balances. Chile’s FX reserves declined from USD55bn in October 2021 to USD41.5bn in August this year. Finally, the labour market is fairly tight too. All of this continues to put pressure on inflation outlook to the discomfort of the central bank.
  • While SocGen expect inflation moderation to begin soon (year-end forecast is 11.22% y/y), the near-term inflation moderation trajectory could well be flatter and not steeper. With the ex-post real interest rate still substantially negative, the central bank probably would like to reach a positive real rate before concluding the tightening cycle.
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