Itaú BBA - CHILE – Monetary Policy Meeting: Steady on

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CHILE – Monetary Policy Meeting: Steady on

October 15, 2020

The central bank would retain a significant monetary stimulus ahead, while adjustments to unconventional measures will be data dependent

The full board of the central bank of Chile expectedly agreed to keep the policy rate at 0.5% at its October meeting, while reinforcing that rates would likely stay at the technical minimum for most of the two year forecast horizon to aid the economic recovery. The board also decided to keep the unconventional measures in force, that include credit support facilities of up to USD 40 billion (USD 27.6 billion utilized) and asset purchases of USD 16 billion (USD 7.0 utilized). Additionally, in line with previous signaling, the board noted that if the need arises, the central bank is willing to augment the current stimulus and adapt measures to support financial stability.
On the external front, developed economies are showing signs of a slowing recovery, in a context of renewed Covid-19 outbreaks that has called for the implementation of intermediate containment measures. The recovery in Latin America is lagging further behind but with widespread differences that reflect the diverging policy responses. Meanwhile, the dynamism of the Chinese recovery stands out, supporting copper price stabilizing around USD 3 per pound. Overall, there has been greater financial market volatility since the previous meeting. In Chile, the increase in long-term fixed income interest rates, the decline in the stock market and the depreciation of the peso stand out.
Domestically, the 11.3% YoY activity drop during August was worse than expected by the market, but further momentum gains were made at the margin (+2.8% MoM) amid significant trade improvements and stabilization signs in the labor market. In this context, the expectations of companies and consumers have continued to recover, although they persist in pessimistic terrain. Nevertheless, credit dynamism is slowing. Commercial credit continues to growth at an annual rate that exceeds the early months of the year, thanks to various stimulus programs, but is now decelerating (+13.7% YoY in 3Q20 vs the 15.1% peak in the quarter ending in July) as demand for working capital funds declines. Consumer loans continue to contract (10.4% in 3Q20), while mortgages are stabilizing at the margin. Overall, credit supply conditions are getting more restrictive due to an increased risk evaluation across all segments.
The central bank acknowledged that the rise of inflation from August to September (from 2.4% to 3.1%) was mainly consistent with the temporary impulse to the consumption of goods linked to the withdrawal of pension savings and some short-term supply restrictions to address the surge in demand. In the medium term, inflationary pressures remain limited, while the two-year inflation outlook is anchored at the 3% target.
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 data dependent, amid possible financial market volatility given a potential second round of pension withdrawals and the constitution referendum approaching.

Miguel Ricaurte
Vittorio Peretti 

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