Chilean Peso: Dovish repricing risk as central bank seen on hold – BBH

Brown Brothers Harriman’s (BBH) Elias Haddad expects Chile’s central bank to keep its policy rate at 4.50% for a sixth meeting, despite market pricing for future hikes. He argues this path is too aggressive given weak domestic activity and a rate near the upper end of neutral, leaving the Chilean Peso (CLP) vulnerable to dovish repricing and pressured by a weaker copper/oil ratio.

Chilean Peso exposed to repricing

"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."