In September, the BCCh’s Board unanimously voted to cut the policy rate by 25-bps to 5.50% and signaled that they would continue to take the policy rate towards neutral (3.5%-4.5%) through the second quarter of next year (an easing pace swifter than previously signaled in June). In contrast to the July policy meeting when the BCCh paused at 5.75%, the Board discussed cutting the policy rate by 25-bps or 50-bps in September. The latter option was swiftly dismissed, while the communicational advantages of the former option were highlighted. We believe the Board’s assessment of the 50-bps option likely comes as a surprise to the market, especially considering July’s pause.
Lower global rates, weaker domestic demand, and anchored inflation expectations. The minutes focused on three factors that had unfolded since the July meeting. Firstly, the Board considered the latest signaling from Fed officials that indicated the start of a rate cut cycle in September, and conditions pointed to a larger cycle than previously priced into the June IPoM. Secondly, activity growth was broadly in line with June expectations, after factoring in a several supply-side shocks, but domestic demand was softer with consumption falling sequentially and non-mining investment weak, all in a context of lackluster credit dynamics. Finally, the behavior of inflation expectations showed that market agents had considered the transitory nature of the effect of the increase in electricity prices. There was a significant rise in inflation expectations in the short term, while in the two-year term they remained at around 3%.
Our Take: The BCCh’s baseline scenario is for 25-bps cuts going forward as it approaches neutral (3.5% - 4.5%). The BCCh will publish an updated traders’ survey on Wednesday, which we expect to reflect the effects of the minutes and the Fed’s decision to cut, with a rate path that should be lower, on average than the previous survey (5.25% terminal for this year; 4.5% over two years). The BCCh’s next monetary policy meeting is scheduled for October 16 and 17. We expect the BCCh to cut by 25-bps in each of the remaining meetings this year, taking the policy rate to 5.0% by year-end. We see rates reaching 4.5% during 2Q25, with the risks tilted toward further easing.