Chilean policymakers’ decision to cut their key interest rate by 25bp yesterday and the dovish tone of the accompanying statement supports our view that the easing cycle has further to run. We continue to expect 25bp of cuts by year-end, and a further 25bp in Q1 of next year, taking the rate to 1.25%.
- Chilean policymakers’ decision to cut their key interest rate by 25bp yesterday and the dovish tone of the accompanying statement supports our view that the easing cycle has further to run. We continue to expect 25bp of cuts by year-end, and a further 25bp in Q1 of next year, taking the rate to 1.25%.
- Last night’s decision by the central bank to lower its policy rate by 25bp from 2.00% to 1.75% was expected by a majority of analysts polled by Bloomberg, including Capital Economics.
- The accompanying statement was noticeably more dovish than the previous one. Rather than saying that further stimulus might be required, policymakers more overtly argued that, “for inflation to converge to the target a further monetary boost is needed”.
- It also included that the need for further stimulus will be assessed considering the “evolution of the macroeconomic scenario, especially after the events of recent days”. This references the protests of recent weeks. Their potential impact on economic activity and confidence they stated that by December report that these would become clear. But the key takeaway is that protests do not seem to have had a significant effect on the thinking of policymakers.
- It appears that the concessions offered by President Sebastián Piñera earlier this week have failed to stop the protests. And more worryingly, there have been further reports of strikes across various mines in the country, including Chile’s largest mine, Escondida, which produces about 20% of Chile’s copper. While the scale of these strikes is unclear, with some mines apparently only cutting part of their overall production, these developments increase the chances of sharp slowdown in mining growth in Q4.
- But we had already expected that growth would disappoint over the second half of the year. We have long held a downbeat view on Chile’s economy this year and expect growth will average around 2.3% y/y over the second half of the year. Consumer confidence remains low, and consumer goods imports have continued to weaken, pointing to a further slowdown in household spending. And although we do expect an overall recovery over the next six months, it is likely to be slow going. (See Chart 1.)
- Inflation has surprised on the downside over the past few months, and fell to 2.1% y/y in September, well below the 3.0% mid-point of the central bank’s target range. (See Chart 2.) Core inflation is low too, at 2.3% y/y in September. We expect a gradual rise in inflation, but think it is likely to remain comfortably below 3.0% over the majority of next year. (See Chart 2 again.)
- As a result, we remain comfortable with our expectation for 25bp of rate cuts at the central bank’s next meeting in December. That would take the policy rate to 1.50%. And further out, we expect another 25bp cut in Q1 of next year, taking it to 1.25%. By that point, we economic activity and inflation are both likely to have strengthened. Meanwhile, the markets are only pricing in 25bp of cuts over the next 6 months.
Chart 1: GDP & Economic Activity (% y/y)
Chart 2: Interest Rate & Consumer Prices
Sources: Refinitiv, Capital Economics
Quinn Markwith, Latin American Economist, +44 20 7808 4072, firstname.lastname@example.org