Itaú BBA - CHILE - Monetary Policy Meeting Minutes: Discussing only rate cuts

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CHILE - Monetary Policy Meeting Minutes: Discussing only rate cuts

February 3, 2017

The board is divided on the breadth of the easing cycle

Cutting the monetary policy rate at the January monetary policy meeting was a no-brainer, as the board did not consider the option to stay on hold, while debating between a 25 and a 50 bps cut. The latter option would have meant implementing the full 50 bps easing cycle outlined in the 4Q16 Inflation Report (IPoM). Ultimately, the board decided unanimously to lower the policy rate by 25bps to 3.25%. We believe the discussed options and comments from some board members suggest there is growing scope for additional monetary stimulus than currently communicated, in line with our expectation.

The recent slowdown in inflation is mainly viewed to be due to the evolution of the exchange rate and less so to the output gap. However, the technical staff notes that its medium term inflation forecasts depend significantly on the assumption of an activity recovery. We note that activity has continued to disappoint and there are growing signs that a notable recovery is less likely.

The policy options proposed by the technical staff differed in terms of communicational risks and flexibility for future moves. As the 25bps rate cut option was in line with market expectations, it curtailed communication risks, while it provided the board with flexibility regarding the second expected rate cut. Meanwhile, cutting the policy rate by 50bps and changing the easing bias to neutral (as suggested by the staff) did not offer a major economic advantage, but would create the risk of misinterpretation by the market.

In spite of the unanimous decision to cut the policy rate, the board is divided on the extent, timing and signaling of further easing. There are at least two board members who kept the door open for stimulus beyond the 50-bp cycle included in the IPoM. One member actually believed the conditions warranted a 50-bp cut already at this meeting. In his view, more easing would likely be necessary, but decided it was too soon to elaborate on this scenario. Another member believed the current data did not warrant a deviation from the baseline scenario in the IPoM, thereby favoring the 25-bp cut. He dismissed the 50-bps and bias change option as it would be difficult for the market to interpret, while the smaller cut retained the flexibility for future stimulus (leaving the door open for more than one cut). Meanwhile, there was one board member who verged on the cautious side. He rejected the inclusion of the 50-bp rate cut option, noting that this was not appropriate in a scenario of an already loose monetary policy. Rather, in addition to the 25-bp cut, staying on hold still held weight in terms of giving the board more time to evaluate the persistence of recent soft activity and inflation readings.

We see the BCCh discretely building the expectation that easing beyond the 50-bp baseline scenario may be necessary. We do not expect any adjustment to the official communication until at least the publication of the 1Q17 Inflation Report (IPoM). However, activity is likely to disappoint in both the final quarter of last year and 1Q17, which in conjunction with the strengthened exchange rate, will keep inflationary pressures muted. We see an easing cycle of 100-bps this year, taking the policy rate to 2.5%. The next rate cut could come this month, with the upcoming January inflation figure (to be published on February 8) being a key input for the decision. Yet, we acknowledge that the central bank may opt for a discontinued easing cycle as part of a strategy to prevent market expectations moving too far beyond the most recent IPoM’s baseline scenario.


 

Miguel Ricaurte

Vittorio Peretti

 



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