Itaú BBA - CHILE – Monetary Policy Meeting Minutes: Shock magnitude calls for prolonged monetary impulse

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CHILE – Monetary Policy Meeting Minutes: Shock magnitude calls for prolonged monetary impulse

September 16, 2020

Despite the less pessimistic outlook, ample stimulus is set to remain in place

The minutes of the September monetary policy meeting note that despite a milder GDP contraction expected for this year, the magnitude of the shock remains significant and the scenario still marked by high uncertainty and risks. Thus, the board reiterated that rates would remain at the technical minimum of 0.5% for “several quarters” and unconventional measures would stay in force, consolidating a significant monetary impulse. The September meeting minutes are brief since a comprehensive outlining of the board’s stance was presented in the flagship monetary policy report released following the policy decision.
There are signs of stabilization on both the health and economic fronts as some sectors adapt to the new norm with more flexibility, while various fiscal and monetary stimulus measures take hold. Nevertheless, the state of the economy remains dire, with activity close to 10% below estimates in September last year. Challenges to the evolution of the labor market and the credit quality of businesses, individuals and the government remain. Regarding the latter, the board expressed concern with the capacity to adopt a sustainable and credible path for public debt. Meanwhile, the somewhat higher-than-expected activity and inflation data helped mitigate the considerable risk of inflation converging to the 3% target over the forecast horizon.
Overall, central bank sentiment is that the impact of the shock on the Chilean economy is set to loiter for some time. With a prevalent output gap, the challenge going forward is to continue to stimulate the economy with the aid of a highly expansionary monetary policy alongside fiscal measures. In evaluating the different programs undertaken, the board agreed that financial market behavior was in line with the objective of easing risks to financial stability. With respect to the asset purchase program at market prices, it was suggested that bank bond buying should be reactivated under conditions similar to those defined in June (maintaining a maximum creditor participation of 20% of each banking institution).

We expect the policy rate to remain at 0.5% at least until the end of 2021, while the evolution of unconventional measures would be determined by financial market responses.Overall, the evolution of the macroeconomic scenario continues to be determined by the development of Covid-19 and the containment measures necessary to protect the health of the population.

Miguel Ricaurte
Vittorio Peretti 

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