Further cuts are signaled, but significant short-term uncertainty is likely to affect strategy. Last month, the Board analyzed two options: continuing with the 25bp rate cut pace; or pausing the cycle at 5.25%. Ultimately, the Board was unanimous in its decision to cut the policy rate by 25bps to 5%. Nevertheless, in the short-term the inflation outlook is more challenging as a stronger global dollar and rising domestic labor costs have pressured core inflation. The medium-term outlook signals softer inflation as private consumption slows, and global financial conditions remain tight.
In coming to their decision, the Board agreed that caution was needed while accumulating information from one meeting to the next, assessing their implications for inflationary convergence and thus determining the timing of rate cuts. Last month, the Board felt the 25bp option was consistent with both the process reducing the restrictiveness of monetary policy and for inflation to converge to the 3% target over the two-year horizon. However, the Board acknowledged that for the decision to be coherent with the abovementioned risks, the communiqué would need to signal that pauses in the cutting cycle were possible. Regarding the option to hold the policy rate at 5.25%, some Board members believed this alternative gave more weight to present risks and better reflected the discomfort represented by an inflation of 5%, with short-term risks biased upwards.
Our Take: While the Board sees a cycle endpoint below current levels, the rise in short-term uncertainty and the proximity of rate to neutral opened the door to caution ahead. The significant CLP depreciation in recent weeks builds on the higher price pressure risks outlined in the December IPoM. We expect the Board to pause the cutting cycle later this month. We see a cycle endpoint of 4.5% as weak labor demand and tighter global financial conditions dent domestic demand dynamics and support lower medium-term inflation. Risks tilt towards a delay in reaching the terminal rate of the cycle. The January MPM will take place on January 28.