The Central Bank of Chile (BCCh), in its last meeting, decided to maintain the Monetary Policy Rate (TPM) at 5.0%, which marks the end of its cycle of rate cuts. According to the Economic Expectations Surveys (EEE), only a 25 bp cut is expected in the last part of this year.

This decision and expectations reflect a cautious stance in the face of external risks, such as the more gradual monetary policy in the US, and at the local level, the latest CPI data (+1.1% and 0.4%) reinforce the regulator's option, as inflation -although it has shown signs of moderation- is still above the target range.

The BCCh's most recent projections place inflation close to 4.0% by the end of 2025, with the expectation of reaching the 3% target in the first half of 2026. So, will we reach these targets?

Currently, the swaps swaps currently put the rate at around 4.3%. This reflects a still latent inflationary risk, coupled with political uncertainty. This leaves little room for innovation.

As we have mentioned in previous publications, the natural refuge is short are short durations, migrating from term deposits a DebtThis is reflected in higher contributions to FFMM and low interest in nominal terms (except for 2-3Y durations, which remain the most attractive area in terms of risk-return curve).except for 2-3Y durations, which are still the most attractive area of the curve in terms of risk-return). In the current economic context, it is natural that market participants are interested in short UF durations, as they offer several advantages:

1. ProtectionWith inflation above the target range and projected to be around 4% by the end of 2025, UF investments offer a natural hedge against inflation.
2. StabilityThe Central Bank maintains the Monetary Policy Rate at 5.0% and a cautious stance in the face of economic uncertainty. Short durations minimize the risk associated with abrupt changes in interest rates.
3. Flexibility and LiquidityThey offer greater adaptability to market changes and facilitate access to funds in an environment where political uncertainty is high.
4. Lower SensitivityShort durations are less vulnerable to rate fluctuations, which reduces the risk of losses in a context of possible monetary policy adjustments.
5. Market PreferenceAttractive performance opportunities in an uncertain environment.

In simple terms, we see a market in search of instruments, preferably with a duration of up to 3 years, trading UF +2.70 in issuers with good performance (AAA) and prioritizing short durations with Depositos Reajustables (DPR)..

Victor Valenzuela

Cash Desk Operator