Itaú BBA - Evening Edition – Additional details on the surprising rate cut in Chile

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Evening Edition – Additional details on the surprising rate cut in Chile

June 10, 2019

Elements justifying the largest rate cut in a decade include the activity outlook downgrade, higher potential growth and lower estimated neutral rate.

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After the unexpected rate cut on Friday, the central bank of Chile (BCCh) released its quarterly inflation report (IPoM) today, providing additional details on the reasoning behind the move. Elements justifying the largest rate cut in a decade – the previous time the BCCh cut rates by 50bps was back in June 2009 – include the activity outlook downgrade (sluggish start to the year), higher short-term potential and long-term trend growth (due to immigration flows), and the lowering of estimated neutral rate (partly reflecting global rates). The board’s working assumption going forward is for stable rates for the following quarters, before starting a gradual normalization process next year.

Updates to the structural parameters helped to explain the additional easing. The influx of immigrants raised the short-term (2019-2021) potential growth to 3.4% (from 3.2% estimated in 3Q18), while the expected range for medium-term trend growth was increased by 25bps, to 3.25%-3.75%. Additionally, the neutral rate range was lowered by 25bps (to 3.75%-4.25%), reflecting the fall in the neutral interest rates of developed economies, only partly compensated by greater potential growth. So monetary policy was not as expansionary as previously thought. On inflation, the yearend estimate was revised up by 0.2 p.p., to 2.8% (against the current 3% target), with balanced risks. The core measure is seen ending 2019 at 2.6% (2.4% previously). On the external front, the report highlighted the negative developments from the trade conflict, with greater risk aversion that provoked a global appreciation of the US dollar and a drop in most commodity prices. In our view, the effects of an unresolved trade war on Chile could be larger than that outlined in the central bank’s new scenario, supporting our call for further stimulus. A prolonged period of uncertainty would likely result in a sharper investment and export slowdown, resulting in further widening of the output gap that motivates the board to cut rates by an additional 50bp.
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Last Friday, Mexico and US senior officials reached an agreement to avert the imposition of tariffs on US imports coming from Mexico. Previously, President Trump had threatened to impose such tariffs on June 10 if Mexico didn’t take action to curb irregular immigration. Some of the measures include the deployment of Mexico’s National Guard to the border, and that asylum seekers who cross into the US will be quickly returned to Mexico, where they will wait for their claims to be resolved. Mexico and the US will continue their discussion on additional measures to address the issue, with an additional announcement in 90 days, if necessary.

Moreover, President Trump hinted that additional measures were agreed, but weren’t included in the official joint statement that will be announced in the appropriate time. Trump added that Mexico would buy soon a large quantity of agricultural products from the US, as part of the border deal. However, Mexico’s Minister of Foreign Affairs said that the US president was referring to additional measures that could be announced in 90 days (if necessary), but reaffirmed that there is no agricultural deal currently included in the negotiation.

Tomorrow’s Agenda: At 10:00 AM, the Statistics Institute (INEGI) will publish April’s industrial production, which we expect to decline by 4.2% yoy (from -0.2% in March).


The median of GDP growth forecasts for 2019 declined for the 15th consecutive week. According to the BCB’s weekly survey with market participants (Focus), the forecasts dropped both for 2019 (-13 bps, to 1.0%) and for 2020 (-27 bps, to 2.23%). The median of IPCA inflation expectations for 2019 fell 14 bps, to 3.89%. For 2020 and 2021, inflation expectations remained stable at 4.00% and 3.75%, respectively. The year-end Selic rate did not change for 2019, at 6.50%, but declined to 7.0% for 2020 (from 7.25%) and to 7.50% for 2021 (from 8.0%). The median of exchange rate remained stable at BRL 3.80/USD for 2019 and 2020, and BRL 3.85/USD for 2021.

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