Itaú BBA - CHILE – Monetary Policy Meeting: Following the global liquidity tide

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CHILE – Monetary Policy Meeting: Following the global liquidity tide

April 1, 2019

Stable rates for most of this year is the likely base case scenario

Following the decision in January to implement the second rate hike (to 3.0%) in the normalization cycle, the board of the central bank unanimously opted to stay on hold this month and indicated low rates for longer. While the board highlighted recent activity data (4Q18) confirms its upbeat non-mining activity outlook, the surprisingly low inflation is viewed to not solely be due to methodological changes, but also to greater economic slack. Hence, the retention of monetary stimulus for a longer period than previously anticipated is required to ensure inflation converges to the 3% target in the medium-term. Overall, this is in line with stable rates for most of this year. 

Non-mining activity performed strongly at the close of 2018, lifted by investment, while the consumption evolvement was broadly unchanged. Weak mining is behind the downside surprises to activity and the board noted that it has resulted in the downgrade to growth forecasts for this year, according to the analyst survey (to 3.4% from 3.6% in January). 

Inflation data utilizing the new basket came in well below expectations and sits far below the 3% target, at 1.7% in February. The central bank deems low inflation is due to cyclical factors such as a more moderate exchange rate pass-through and the assessment of a wider output gap than previously estimated (something the board attributes to heightened immigration). Yet, the central bank notes that convergence to the target in the medium-term remains a valid view (downplaying the possibility of structurally low inflation). Surveys show that while short-term inflation forecasts have been revised down, yearend estimates remained broadly unchanged and inflation is still seen near the 3% target in two years. 

On the global front, the outlook continues to deteriorate with core economies growth forecasts adjusted downwards. Accordingly, large economy central banks adopted a more accommodative monetary policy (particularly the Fed), while the inversion of the U.S. sovereign yield curve reflects global growth concerns. Despite volatility, copper prices remain elevated since the previous policy decision and the sovereign risk premiums for Chile remained contained. 

On Monday (April 01), the central bank will complement today’s decision by updating its baseline scenario in its flagship quarterly Inflation Report (IPoM). Weaker momentum at the start of the year could result in the growth forecast for this year to be shaved from the current 3.25%-4.25%, while inflation convergence to the target is slower. Considering the riskier global environment, the notable dovish turn by the Fed, and the view that the output gap is wider than previously estimated, the central bank is set to introduce an even more gradual monetary normalization path (versus the previous view of reaching neutral levels, 4%-4-5%, by mid-2020). We still expect only one further 25bp rate hike later this year, taking the policy rate to 3.25%.


 

Miguel Ricaurte
Vittorio Peretti



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