Itaú BBA - CHILE – Monetary Policy Meeting Minutes: No reason to adjust expansionary stance

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CHILE – Monetary Policy Meeting Minutes: No reason to adjust expansionary stance

October 30, 2020

Flexibility on the unconventional measures will depend on possible financial market volatility ahead

The minutes of the October monetary policy meeting stress that all five board members believe the adverse macroeconomic scenario and lingering risks mean retaining the policy rate at its technical floor of 0.5% for a prolonged period remains the only relevant option. Additionally, the board deemed it appropriate to keep in place unconventional measures that aid liquidity and credit, by advancing with the asset purchase program, while signaling a preparedness to respond further if the economic scenario evolution demands.
 
In general, the evolution of both the international and local economy has been consistent with the scenario outlined in the September monetary policy report (IPoM), while there was consensus that the presence of risks, with negative implications, remained relevant. It was noted that the pace of economic recovery would be dependent on steps taken going forward to keep the pandemic under control, amid the resurgence of second waves in numerous countries. On the external front, uncertainty had intensified as the US election nears and the Brexit process concludes. Having a vaccine widely distributed in a short period of time is also a risk factor.
 
Domestically, the direction of data surprises was mixed, but the clear takeaway was that the worst of the pandemic was behind the Chilean economy. Weaker-than-expected August activity was aligned to a delay in economic re-opening compared to what had been anticipated in the 3Q IPoM. We note the upbeat September activity indicators would likely ease concerns over the recovery process. Meanwhile, it was expressed that the impact of pension saving withdrawals and increased fiscal transfers likely drove greater inflationary pressures in September. Nevertheless, the nature of the boost and the persistence of large negative output gap reaffirm the view that medium-term inflationary pressures would remain contained.
 
Political risks are a concern, while those related to the labor market and inflation expectations had moderated somewhat. The measures implemented by authorities in several countries to contain the spread of the virus had led to considerable stress on society, which, in the case of Chile, accentuated the tension that arose during the social unrest at the close of last year. The board could not rule out that these events were impacting financial asset prices in Chile. While country risk measures remained low, it was evident that since the second quarter the peso had depreciated and long-term rates were trending upwards, while the stock market had fallen by more than its counterparts. Overall, the board deemed it difficult to ascertain how much of the movement of long-term rates was due to transitory phenomena and how much to more persistent factors, for which BCCh policies had limited capacity to address. We note that the advancement of a second round of pension withdrawals and the uncertainty over the constitution rewriting have the potential to consolidate a steep yield curve. On the other hand, there were positive signs from the labor market with job gains at the margin and indications that the impact of the pandemic on salaried jobs had been milder than anticipated. Another favorable development was that inflation expectations had moved towards the 3% target, diluting concerns for the anchoring of expectations.  
 
With medium-term inflationary pressures contained amid the large increase in the negative output gap, we expect the central bank to retain significant monetary stimulus, with rates at 0.5%, for the remainder of this year and 2021. Flexibility on the unconventional measures will be dependent on possible financial market volatility ahead due to political events.

Miguel Ricaurte
Vittorio Peretti 



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