We believe the BCCh will wind down the tranche of cuts it began a year ago with a 25bp cut, taking the monetary policy rate down to 5.5%. After having swiftly brought the policy rate closer to the upper bound of the neutral rate, the BCCh’s guidance pointing to an additional cut in the cycle, and upcoming supply-side related inflationary pressures stemming from higher electricity prices, lead us to envisage a 25bp cut in the July policy meeting and then entering a prolonged pause, ensuring that inflation expectations for the two-year horizon remain anchored. The updated guidance that signals a period of stable rates may come in the form of: “The Board’s baseline scenario envisions a further lowering of the policy rate over the monetary policy horizon, but at a pace that will factor in the evolution of the macroeconomic scenario and its implications for the inflation trajectory.”
Fed to begin easing earlier than the BCCh expected, as the decline in copper prices weakens the CLP. While the Fed has expressed a cautious tone regarding the start of its easing cycle, incoming inflation and labor market data in the US have led to the market pricing in a cut in September, earlier than the BCCh’s forecast of no Fed cuts this year (and a total of 70bps in 2025). We expect the Fed’s gradual easing cycle to start in September with a 25bp cut, followed by another one in December, and three more in 2025. Of note, concerns over global demand have seen copper prices retreat by around 5% since the June meeting, and the CLP depreciate by 1%.
Core inflation surprised to the downside in June but should rise on the back of higher electricity prices. Headline inflation fell 0.1% MoM in June, dragged by Cyber Day sales, and in line with the BCCh’s IPoM implicit estimate. However, the June CPI print had electricity prices rising by 7.2%, as the significant supply-shock commenced and is expected to intensify in the coming months. Annual inflation in the reference series rose to 3.8% (3.4% previously). Core inflation was more favorable, falling by 0.2% in the month, well below the BCCh’s implicit +0.1% estimate, with the annual variation dropping 0.3pp to 3.2%. At the margin, we estimate that inflation accumulated in the second quarter was 4.2% (SA, annualized), down from 5.4% in 1Q24 (but up from 3.3% in 4Q23). Meanwhile, core inflation reached a lower 3.0% (SA, annualized, 4.5% in 1Q24 and 2.6% in 4Q23).
Short-term inflation expectations edge higher. While inflation during 1H24 was well-behaved, the array of supply-side pressures is leading to higher inflation expectations at shorter-term horizons. Both trader and analysts’ surveys retained the key two-year CPI outlook at 3%, but the one-year expectation has risen to 3.6%. On the other hand, spot breakevens for the two-year period have ticked above the 3% target. Additional electricity price hikes through 1H25 (see chart), persistent CLP passthrough pressures (the CLP is roughly 15% weaker than one year ago) and rising global freight costs should pressure inflation to edge higher, even above the 2-4% tolerance range, before it swings back to the 3% target. The core dynamics, which do not directly include electricity prices, support the central bank’s emphasis on the transitory nature of the electricity shock.
Domestic activity dynamics at the margin have been weaker than anticipated by the BCCh, as leading indicators point to soft momentum. The monthly GDP proxy contracted sequentially for a third consecutive month in May. The monthly decline of 0.4% (MoM/SA) in May (-0.3% in April) was led by manufacturing, services, and commerce. Activity is projected to have rebounded in June, due to the transitory effect of rainfalls on electricity output, and Cyber Day sales during the first week; yet the suspension of classes in certain regions could weigh on activity. We project the monthly GDP proxy to rise by 1.8% YoY in June (to be published by the BCCh on August 1, the day after the monetary policy meeting), which would take 2Q24 growth to 2.1% YoY, below the 2.6% implicit in the BCCh’s June IPoM. Capital goods imports fell by 12.1% YoY in 2Q24, while business confidence as measured by the IMCE fell to 43.78 in June, below the peak of 46.31 in March, remaining sub-neutral (50) since February 2022. Employment growth has moderated at the margin, while the share of informal salaried posts in job creation has increased.
Persistent weakness in commercial loans raises risk of a slow investment recovery. Credit dynamics through the bank lending channel in May call for caution on the projected recovery path, especially due to the contraction in outstanding commercial loans and anemic growth on a flow basis. Weak commercial credit growth was highlighted as a watch point by the BCCh in the June IPoM, which could crystallize the risk of a persistent delay in the recovery of investment. After the June meeting, the BCCh’s 2Q24 bank lending survey suggested that credit supply remained stable, while demand weakened. Also, after the June policy meeting, data from the Financial Market Commission showed that outstanding loans from the banking system fell by 1.15% YoY in real terms in May, contracting for the second consecutive month (-0.3% in April; -3.09% in May 2023). Outstanding real commercial loans fell again, contracting by 3.4% in May (-2.67% in April; -5.37% in May 2023), Separately, the persistent rise in commercial loan NPLs remains a source of concern.
Our Take: We expect the BCCh to close off this phase of the easing cycle with a 25bp cut to 5.5% in the July 31 monetary policy meeting, followed by a prolonged pause. Our Central Bank sentiment classifier suggests that recent communication signals a neutral shift. We expect rate cuts to resume in late 2025 to 4.5%, the ceiling of the BCCh’s current nominal neutral range (3.5%-4.5%). The minutes from the June meeting showed that the Board believed the 25bp option signaled the transitory nature of the supply-shock, and would consolidate expectations of lower rates over the forecast horizon. The option also gave the Board flexibility to implement another cut during the remainder of the year if the central scenario materialized. Core inflation in June came in below the central bank’s scenario, while weak commercial credit dynamics have probably heightened downside risks to the activity recovery path, providing room for another cut in our view. The following monetary policy meeting is scheduled for September 3, with the IPoM to be published on September 4, with the latter likely to include a revision to the structural parameters, with a possible upward revision to the center of the neutral rate range.
