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CHILE – Monetary Policy Meeting Minutes: Confirming stable-rates scenario

November 29, 2017

Expect no surprises in the 4Q17 Inflation Report

The minutes of the November monetary policy meeting hint that the upcoming inflation report (IPoM, December 4) would reiterate the scenario of stable rates for a prolonged period. The board voted unanimously to leave the policy rate at 2.5% in November, with the relevant options presented by the technical staff still being no rate move or implementing a 25bps rate cut. Overall, the view was that a favorable external scenario is aiding the activity recovery, in turn, supporting the target convergence of inflation over the relevant horizon, as anticipated in the 3Q17 IPoM. Yet, the board remains cautious, acknowledging the risk that the convergence of inflation to the target takes longer than anticipated.

The board and technical staff seem content that core inflation is broadly in line with its baseline scenario. The lower than expected headline inflation has been mainly due to volatile items (in particular food prices) along with the impacts from a stronger currency being translated to minimal tradable inflation. The upside October inflation surprise partly undid the impact from previous surprises in the opposite direction. Meanwhile, the previous rise in real rates following weaker inflation and inflation expectations, has largely been reversed and the policy stance remains at expansive levels similar to that recorded at the publication of the 3Q17 IPoM.

The technical staff cautioned the board not to take inflation expectations for granted. While the board’s preferred measure of 2-year inflation expectations – obtained from the central bank analyst survey – remain anchored at the 3% target, the staff highlighted the importance of other measures (asset prices and trader surveys) that have shown inflation expectations persistently below the target. The perseverance of such an outlook is deemed a risk for the price formation process.

Activity was still viewed to be en route to recovery. The mining related rebound is the driving force behind an overall improvement, but one board member noted the dissimilar performance across productive sectors (with two board members pinpointing construction as one of the weak areas). Most board members highlighted the favorable and, in some respects, improved external scenario, while one of them noted the effect of higher copper prices on mining investment were still to be seen.

Overall, the board portrays the view that between September and now, not enough has happened to demise the relevance of the baseline scenario. Headline inflation has been lower than expected in the short-run, but core measures are consistent; global activity is somewhat improved and the closing of the output gap is still projected. So, the expectation that the convergence of inflation to the target in the medium-term has not been compromised, even if the timing of the convergence may be somewhat slower. However, one board member did appear to be leaning towards more easing, but noted that the rate cut option at this meeting was mitigated by the ending or reversion of some of the main risks outlined at the October meeting (declining two-year inflation expectations and a rise in real market rates).

We expect the central bank to keep the policy rate stable at 2.5% at the December meeting as well as most of next year. Nevertheless, if the activity rebound underwhelms (delaying the narrowing of the output gap), and some inflation expectations stay suppressed, we cannot rule out additional rate cuts.


Miguel Ricaurte

Vittorio Peretti

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