Itaú BBA - CHILE – Monetary Policy Meeting: A 75-bp intermeeting rate cut and measures to support the financial

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CHILE – Monetary Policy Meeting: A 75-bp intermeeting rate cut and measures to support the financial

March 16, 2020

The global liquidity wave paved the way for rate cuts in Chile.

The central bank of Chile followed in the footsteps of global counterparts in increasing monetary stimulus and liquidity measures in an effort to ensure the normal functioning of credit markets and limit the impact from the coronavirus shock. The policy rate was cut by 75 bps to 1.0% in an extraordinary meeting more than two weeks ahead of schedule. The decision was not unanimous as two of the five board members (Alberto Naudón and Rosanna Costa) backed a 50bp rate cut. Additionally, the central bank announced several liquidity measures (with unanimous support from the board): the availability of a conditional financing facility to banks to help increase loans, the possibility of using corporate bonds as collateral in transactions between the central bank and financial institutions, the launch of a bank bond purchase program and the extension of November’s foreign exchange program from the end of May to January next year. The moves are in line with the expectation that Chile’s economy is set to be unfavorably affected by the two-pronged nature of the shock (both to demand and to supply).

The Chilean central bank’s move was supported by generalized monetary policy action in the developed markets. The global expansion of COVID-19 and the associated financial turmoil led the Fed to lower its policy rate to 0%-0.25% and committed to purchasing up to USD 700 billion of government bonds and MBS in a return to a policy stance not seen since the global financial crisis. While economic data has yet to incorporate the effects of global disruptions stemming from COVID-19, the rate of the advancement of the virus within Chile and the subsequent measures being taken to combat the outbreak suggest that impact on sales and cash flows of companies could be significant and, if sustained, would negatively impact economic activity and the labor market even after the outbreak ends. Chilean officials reported 155 confirmed cases of COVID-19 as of today, more than doubling from the 75 cases stated yesterday. President Piñera announced the closure of Chilean borders for personal travel, in addition to measures announced over the weekend that include the forbidding of gatherings of more than 200 individuals, and the closure of the schooling system for two weeks. 

Beyond cutting the policy rate, the board adopted a set of measures to ensure the normal functioning of the credit markets and an effective transmission of the larger monetary impulse. First, a conditional financing facility (FCIC) will be opened to banks to boost loans. This facility would be operational for the next six months, with four-year credit terms. The initial loan amount would be 3% of the commercial and consumer portfolio as of the end of February (so around 1.5% of GDP). An additional loan amount channeled through the FCIC will be proportional to the increase in the placements of each institution, with respect to its base portfolio. The interest rate on the loans would be the policy rate at the time (currently 1%). Second, corporate bonds will be included within the eligible collateral for all current liquidity operations of the central bank in pesos. Third, a purchase program of bank bonds will be initiated to the participants of the Open Market Operation System for an equivalent amount in UF (inflation indexed unit) of up to USD 4 billion dollars (another 1.5% of GDP). Finally, the term of the foreign exchange sales program will be extended until January 9, 2021. The program was originally set to expire in May. The package is up to USD 20 billion dollars split evenly between NDFs and spot operations. To-date, USD 4.5 billion NDFs and USD 2.5 billon spot sales were undertaken.

Going forward, further monetary policy easing cannot be ruled out. Despite some board members being more cautious, the expectation that growth for this year will likely come in well below the 1.2% recorded last year (4% in 2018), and the fact that tradable inflationary pressures (on the back of the exchange rate weakening) are offset by a widening negative output gap, we cannot rule out additional rate cuts ahead (next MPC remains scheduled for March 31). We note that during the global financial crisis, the Chilean central bank brought the policy rate to an all-time low of 0.5% and adopted quantitative easing measures to bring long-term yields down.

 

Miguel Ricaurte
Vittorio Peretti



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