Chile's BCC Holds Again, Though Rate Cuts Coming in H223

• After the Banco Central de Chile (BCC) decided to hold its policy rate at 11.25% at its May 12 meeting, Fitch continues to expect the rate will remain on hold through H123 as inflation – though slowing – remains far above the bank’s target.
• This was the fourth-consecutive hold and came in a unanimous vote. The accompanying statement underlined that the Chilean economy has continued to cool (though the bank removed the statement that the economy was adjusting slower than expected), while headline and core inflation and medium-term inflation expectations all remain above the bank’s 3.0% target.
• Additionally, the bank reiterated that it “considers it appropriate to maintain the policy rate at 11.25% until the state of the macroeconomy indicates that inflation is converging to the 3% target.” The bank did not offer clear forward guidance, but the tone of the announcement did not suggest an imminent change in stance, according to Fitch.
• It is anticipated that the bank will begin cutting rates in H223 as disinflation continues and the US Fed goes on hold, though Fitch has revised its end-2023 forecast up from 7.75% to 8.25% as economic activity appears somewhat stronger than anticipated.
• Risks to Fitch’s forecast are slightly to the upside, as a stronger economic performance could lead to a slower deceleration in price growth and fewer rate cuts than expected given concerns that fast rate cuts could reignite inflationary pressures.

(Source: Fitch Solutions)