Itaú BBA - CHILE – Monetary Policy Meeting Minutes: Uncertainty favors retention of significant impulse

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CHILE – Monetary Policy Meeting Minutes: Uncertainty favors retention of significant impulse

December 23, 2020

We see rates stable at 0.5% throughout 2021 and part of 2022

The minutes of the unsurprising decision to keep the policy rate at 0.5% and retain the unconventional liquidity and credit support measures do show that significant uncertainty regarding the economic recovery supports reinforcing the stance that significant monetary impulse would be maintained for an extended period.

While there were favorable developments on the global front (vaccine newsflow; China recovery; copper prices; reduced risks), the board viewed domestic news as less upbeat. Local activity had surprised to the downside, with both consumption and investment underwhelming. Additionally, the central bank noted the difficulty in analyzing the data given doubts as to what was attributed to the COVID-19 support measures, what was reflection of more permanent economic damage from the crisis and what fell into statistical noise. It was noted that a similar challenge was unfolding with inflation, which had been volatile in recent months. Nevertheless, the inflation evolvement had reduced the risk of persistently low inflation that could have filtered through to falling inflation expectations. Going forward, the board noted that an important factor in the macroeconomic scenario would be the evolution of uncertainty and its possible influence on investment. Further outbreaks of the virus, fear of social unrest, and financial difficulties for some companies could influence business behavior in so that the investment reactivation path does not advance beyond large-scale public and private projects. 

The underwhelming use of the credit support program (FCIC) raised concern over the intended monetary impulse. While the full FCIC and LCL facility was accessed during the first rounds of offering (around USD 24 billion in total), only a third of the USD 16 billion second phase FCIC has been utilized since its launch in July. The board questioned whether the limited use of the second phase by the financial system was reflective of structural damage inflicted by the crisis that, if the case, could affect the economic recovery in a more permanent way. Overall, the board agreed to see what adjustments could be made to such measures, such as possible extensions and changes in access parameters, that would facilitate its use to respond to the needs of the economy. We note that commercial credit growth peaked at 16% yoy in June (13% in the first three quarters of the year), but has since moderated to just 7% in November. This month, the finance ministry submitted a second SME’s credit guarantee initiative that aimed to increase the attractiveness to both lenders and borrowers through flexible interest rate and longer terms.  

The still-wide output gap, along with anchored inflation expectations, supports the retention of significant monetary stimulus going forward. We see rates stable at 0.5% throughout 2021 and part of 2022. 

Miguel Ricaurte
Vittorio Peretti 

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