CLP: Chile Begins Easing Cycle with Anticipated Rate Cut

CLP: The start of the easing cycle

Looking around the world, Latam has suffered some of the larger spikes in inflation over the last couple of years and has responded with some of the larger tightening cycles. They have also seen some heavy disinflation this year and may be the first to embark on large-scale easing cycles – hence all the interest in local bond markets and widespread receiver trades amongst the hedge fund community.

Later today we could see the first big cut in the region, in Chile. Here the central bank has said it will be starting its easing cycle soon and expectations are that the policy rate will be cut by 75bp today to 10.50%. We doubt that will weigh on the Chilean peso (CLP). But equally, we have been forecasting that the CLP lags the currency rally in Brazil and especially in Mexico because FX reserves are too low in Chile. Indeed in June, Chile announced that a new FX reserve building programme lost around half its reserves last year in trying to limit CLP losses. In short, we doubt USD/CLP trades below 800 on a sustained basis.