Rethinking the BCCh: We Now Expect Three More Cuts

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Rethinking the BCCh: We Now Expect Three More Cuts

IdeaMglobal growth would likely support risk appetite, reduce pressure on the US dollar, and

improve external financing conditions. This would provide the BCCh with greater

confidence to focus on domestic conditions rather than reacting pre-emptively to global

financial developments.

We think Chile is particularly well positioned to benefit from such an environment. Chile's

recent data point to softer activity, weakening labor market dynamics, and an inflation

process that has consistently surprised to the downside despite the oil shock. As gasoline

prices begin to normalize through MEPCO and headline inflation moves below target, a

less restrictive global backdrop would reinforce the case for resuming the easing cycle.

Perhaps more importantly, the tolerance for exchange-rate depreciation has increased

materially. With both one- and two-year inflation expectations firmly anchored at the 3%

target and our baseline pointing to headline inflation undershooting target by year-end,

the inflationary consequences of a moderate peso depreciation are substantially smaller

than they would normally be. Indeed, in an environment of below-target inflation and

sluggish domestic activity, allowing the exchange rate to act as a shock absorber may even

be desirable. For a small, open economy such as Chile, some currency depreciation would

help cushion weaker external demand and support competitiveness without jeopardizing

the inflation target, provided medium-term expectations remain well anchored.

Taken together, the external environment no longer appears to be the binding constraint

on monetary policy that it was during previous easing cycles. Instead, if our inflation