Monetary policy update: A return to caution

CHILE - Report 08 Sep 2023 by Igal Magendzo

The September Monetary Policy Report (IPOM) returns to the cautious tone that prevailed prior to July’s Monetary Policy Meeting (RPM). The June CPI led to accelerating cuts, but now the July CPI and the recent depreciation of the exchange rate have caused increased caution, and a slowdown in the pace of cuts, shifting from -100bp to -75bp.

Throughout the IPOM, there is a clear emphasis on exchange rate risks. As an illustration, the word "depreciation" appears 11 times, compared to only three in the previous report. Likewise, there is a reiterated analysis of the divergence in inflation and monetary policy with respect to the developed economies, particularly the United States. Moreover, and unlike in previous reports, the September report mentions the exchange rate effect that a further deterioration of activity in China could have. The depreciation of the currency, together with higher fuel prices and the impact of weather on perishable food prices, offset the downward effect of the lower-than-expected June CPI in the Central Bank's projection.

In any case, the Central Bank does not expect a further depreciation, or a further deviation of the peso from its fundamentals, since it assumes a stable real exchange rate going forward.

The most controversial aspect of the IPOM is the baseline projection for the Monetary Policy Rate (TPM), which would still be more than 350bp above its neutral level by the end of 2023. This would occur with inflation close to 4%, and the output gap moving into negative territory. In addition, and according to the IPOM baseline scenario, inflation of the non-volatile CPI (IPC-SV) will be at 6.3% by the end of the year, and one-year-plus expectations will be anchored in the center of the target range.

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