Chile : The BCCh’s dilemma

W e believe the central bank of Chile’s policy rate is very close to its terminal level. In our view, the terminal rate is around 10.50% implying that the BCCh might slow down the pace of hikes in September and October to 50bps/25bps from the current pace of 75bps per meeting. More importantly, we believe the BCCh will start a cutting cycle in May-2023 taking the policy rate to around 6.50% by December 2023. The BCCh will take the policy rate to nominal neutrality (3.50-3.75%) in 2024. The BCCh has increased its policy rate at an unprecedented pace and it may be near its terminal level. In fact, we believe the market’s discussion should now center on the timing of the easing cycle and about how aggressive the BCCh could cut the policy rate in 2023. At times the BCCh has surprised the market despite having tools to guide the market. Unlike other central banks in the region, the BCCh provides forward-looking guidance via its monetary policy communique and via the publication of the ‘rate corridor’ in the quarterly Monetary Policy Report (IPOM). This guides the market by providing a direction and range of future changes in the policy rate. Despite these guiding tools, the BCCh has had no choice but to surprise the market due to the record-high changes on inflation, the massive widening in the current account and the unprecedented developments in politics (ie. the re-writing of its constitution and the arrival of the most far-left government in decades). Paraphrasing Sir John Maynard Keynes, when the facts change, the BCCh changes its mind.