Central Bank of Chile will not be able to ignore the worst performing currency in the world

A month ago, the fixed income market in Chile was betting on an acceleration in the central bank’s interest rate cuts. That would be a thing of the past.

The rise of the dollar against the peso and the recent Treasury rate increases led 80% of traders surveyed in the latest survey conducted by Bloomberg News to now expect that the central bank will maintain the pace of rate cuts at one point. percentage at its meeting on April 2. By comparison, in the February survey, nearly two-thirds expected an acceleration in the pace of cuts.

The Chilean peso has been the worst performing currency in the world so far this year, with a drop of 8.7% against the dollar. This figure is almost double the loss of any of its emerging market peers. Additionally, economists have been delaying their estimates of when U.S. rate cuts will begin. Now, in May – for the first time since 2019 – the MPR in Chile is expected to fall below that of the US. This will increase pressure on the peso.

“The significant depreciation of the CLP, being one of the worst performing currencies of the year, and its consequent pass through to inflation, would limit any acceleration of the pace of BC rate cuts.“Mariano Álvarez, fixed income manager at LarrainVial, said by email.

The market is already anticipating it. “Swap rates now discount a policy rate of 4.5% in one year, compared to 4% in January,”endorsing the thesis of non-acceleration of cuts”Alvarez said.

Central Bank of Chile

Just three weeks ago, the CBC said in the minutes of its last meeting that some authorities were pushing for more aggressive easing. One advisor even wanted to study a reduction in borrowing costs of 1.5 percentage points, which would correspond to the largest rate cut since 2009.

The bank has already cut rates by 4 percentage points to 7.25%, more than any other major central bank in America.

But a lot has changed since the last meeting on January 31. In addition to the decline in the peso and the rise in Treasury rates, there is evidence that the economy in Chile is recovering. On Friday it was reported that the Monthly Index of Economic Activity, or Imacec, registered its largest expansion in January since June 2022.

Added to this are the recent changes in the CPI basket. Greater exposure to imported products could also affect inflation.

Returning to the survey, two-thirds of the 15 traders surveyed said that the direction of Treasury rates this month will be the main driver of the local bond market. Only 20% said it will be the exchange rate and 13% pointed to local macroeconomic data.

Among the local political factors that could weigh on the market, the tax reform took 47% of the votes, followed by the pension reform, with 40%. Congress will resume discussion of those bills this month after the February legislative recess.

President Gabriel Boric’s first tax reform was rejected at the end of March in the Lower House. According to internal rules, the Government had to wait 12 months before presenting a new reform. That period has already passed.