Chilean Peso: Expected central bank hold carries dovish repricing risk – BBH

Chile’s policy rate is expected to remain at 4.50% for a sixth meeting. That is the view of Brown Brothers Harriman’s (BBH) Elias Haddad, although markets are pricing in future hikes. With domestic activity weak and the rate close to the upper end of neutral, he considers the implied tightening path too aggressive. This leaves the Chilean Peso (CLP) exposed to dovish repricing, while a declining copper/oil ratio adds pressure.

4.50% Rate Outlook: Chilean Peso Faces Repricing Risk

"Chile’s central bank is widely expected to keep the policy rate on hold at 4.50% for a sixth straight meeting (9:00pm London, 5:00pm New York). The swaps curve implies 50bps of hikes to 5.00% in the next twelve months and 100bps of cumulative tightening over the next two years."

"We think this is too aggressive given weak domestic economic activity and the policy rate already near the upper end of the bank’s 3.75-4.75% neutral range. That leaves CLP vulnerable to a dovish repricing."

"The decline in the copper/oil ratio also weighs on CLP as higher energy import costs dilute the benefit of firm copper prices."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)