Itaú BBA - Chilean central bank increases its policy rate to 3.0%

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Chilean central bank increases its policy rate to 3.0%

January 31, 2019

We retain our view of a gradual normalization cycle, with risks clearly tilted to fewer hikes

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The board of the central bank unanimously opted to raise the policy rate by 25bp to 3.0%, as widely expected. This is the second hike in the normalization cycle, following last October’s increase of the same magnitude. The board continues to see the domestic economy consistent with the scenario outlined in the 4Q18 Inflation Report (IPoM), as activity remains robust and output gap-sensitive inflation measures are gradually rising. However, the press release announcing the decision toned down the tightening bias, due to weaker-than-expected growth in the core economies (leading to a more accommodative monetary policy stance by the main central banks). The press release highlighted strengthening credit demand in 4Q18, strong investment indicators, stable wage growth (at 4%), while acknowledging some weakening in durable consumption performance. In turn, the relevant core inflation measure (which excludes food and energy) continues on an upward trajectory to the 3% target.

However, in the concluding remarks, the board mentions that the 1Q19 IPoM (to be published April 1) will place special focus on the evolution of the international scenario and how this could affect the convergence of inflation to the target. The press release notes the deteriorating growth expectations for developed economies and the signaling of a more gradual normalization process of monetary policy globally. If the central bank considers the worsening global outlook to have a significant negative impact on the small open Chilean economy, the board could favor an even more gradual normalization process (relative to the 4Q18 IPoM). We also note that the board dropped the reference to a “highly expansionary” monetary policy position that was highlighted in the December communiqué. The board’s previous evaluation on the degree of monetary stimulus came amid an output gap that had narrowed significantly.

We retain our view of a gradual normalization cycle, with risks clearly tilted to fewer hikes. Moreover, the timing for future rate hikes appears to be more data dependent now. However, as the policy rate remains far from neutral levels (4.0%-4.5%), and the central bank views the output gap near closed, the continuation of a gradual tightening process is justified.

In 2018, Chile’s fiscal consolidation advanced. The nominal fiscal balance reached a deficit of 1.7% of GDP, from a 2.8% of GDP deficit in 2017, smaller than the 1.9% deficit forecasted by the government in September. The smaller than expected deficit can largely be attributed to taxes from the private sale of a stake in a non-metallic mining company. Overall, fiscal consolidation is underway with real expenditure growth slowing to 3.4% last year (4.7% in 2017), the lowest gain since 2011. Current expenditure rose 3.9% (6.4% in 2017), while capital expenditure recovered with growth of 0.9% (-3.2% in 2017), the first positive print since 2015. Meanwhile, revenue in real terms grew 8.8% in 2018 (4.7% in 2017), lifted by the 83% rise in private mining income tax, while revenue from Codelco grew 21.4% as copper prices continued to recover in the year. VAT revenue is the largest single contributor to revenue (47.3%) and increased 5.0% in the year. Overall, Chile’s 2018 structural deficit came in at 1.5%, from the 2.0% recorded in the previous year, in line with converging to a 1% of GDP in 2022 deficit. 

Gross public debt ticked up to 25.6% of GDP in 2018, from 23.6% in 2017 and 21% in 2016. Finance Minister Felipe Larrain commented that the 2pp increase in debt can be explained by debt issuance, while the aim would be to stabilize debt to GDP in 2019. Given that the debt level for Chile remains low compared to peers, stabilization would likely keep rating agencies at bay (the preoccupation has rather been with the speed of the debt increase). Despite the commitment to even lower expenditure growth this year (3.2% yoy budgeted), we see the nominal fiscal deficit broadly stable this year as copper prices post some retreat and activity moderates as the global economy slows. 

Day ahead: The national institute of statistics (INE) releases industrial activity indicators for December at 10:00 AM (SP Time). We expect manufacturing production to increase 1.5% yoy (-4.7% previously), aided by a particularly low base of comparison. At the same time, INE will release the national unemployment rate for 4Q18. We expect the unemployment rate to come in at 6.7%, above the 6.4% recorded one year before and result in an average unemployment rate of 7% in 2018 (6.7% in 2017).


Mexico’s GDP flash estimate came in below market expectations in 4Q18, dragged by the industrial sector. The flash estimate of GDP growth for the 4Q18 came in at 1.8% yoy, below our forecast (1.9%) and market expectations (2.0%), taking the annual growth to 2.0%. Looking at the breakdown, using calendar & seasonally-adjusted data, industrial sector was the main drag to economic activity, receding -0.6% yoy (from 1.1% in the 3Q18).

At the margin, GDP also decelerated. Using seasonally adjusted figures, the economy decelerated to 0.3% qoq in the 4Q18 (from 0.8% in the 3Q18). Looking at the breakdown, industrial sector contracted 1.1% qoq (from 0.5% in the 3Q18), while primary sector accelerated to 1.9% (from 0.4%) and services sector remained virtually unchanged (0.8%).

We expect economic activity to decelerate to 1.7% this year, from a preliminary estimate of 2.0% in 2018. Uncertainty over the new administration’s policy direction and remaining uncertainties over the approval of NAFTA by the U.S. Congress will continue to impact the investment. Deceleration in the U.S. economy will also curb growth.
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According to FGV, confidence within the services sector rose 3.7% in January to 98.2, the fourth consecutive increase, reaching the highest level since March 2014. The increase was driven mainly by expectations (5.6%), while current conditions rose 1.2%.

Day ahead: December’s PNAD national unemployment rate will be released at 9:00 AM (SP Time). We forecast a 0.2 p.p. decrease to 11.4% (stable on seasonally adjusted terms). Also, the consolidated public sector result for the month of December will be released at 10:30 AM (SP Time), for which we expect a BRL 37.7 billion deficit. 


Day ahead: The institute of statistics will release the unemployment rate for December at 1:00 PM (SP Time). We expect the urban unemployment rate in December to come in at 10.6% (from 9.8% one year before), leading to 10.2% unemployment in 4Q18 (9.6% one year before). Also, the central bank will hold its first monetary policy meeting of 2019. We expect no change of status-quo, with stable rates (4.25%) remaining likely for still some time. The dilution of the financing law reduces the inflation risks for this year, inflation expectations are anchored, the activity recovery fragile and the external environment risky meaning the board is unlikely to reduce the mild stimulus just yet.

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