Itaú BBA - CHILE - Monetary Policy Meeting: The waiting game

Macro Latam

< Back

CHILE - Monetary Policy Meeting: The waiting game

May 10, 2019

Raising global tensions may be motivating additional caution within the board.

The board of the central bank unanimously chose to leave the policy rate at 3.0% and signals steady rates ahead. The guidance included in the Inflation Report (IPoM) released just one month ago was for stable rates for at least two quarters (4Q19), before the resumption of the gradual normalization process. However, in this month’s press release, the board states that the required course for monetary normalization that would ensure inflation’s convergence to the target would be evaluated in the June 10 IPoM. While the overall assessment of the economic outlook remains broadly unchanged from the 1Q IPoM, rising external risks related to the trade dispute between China and the U.S. may be motivating additional caution within the board.

Risk aversion sentiment has risen in recent days as trade tensions escalated. Global stock markets and commodity prices have declined, including copper, while the Chilean peso has followed the global trend of weakening against the USD. Meanwhile, domestic rates have not had significant movements.

Activity came in below the central bank’s expectation for 1Q19, but this was mainly due to weak mining and other volatile sectors. On a positive note, services and investment are robust and their outlook remains upbeat (given the performance of construction and upside revision to the basket of private investment projects reported by the Corporation of Capital Assets). Meanwhile, on the consumption front, slower durable consumption was compensated by stronger services. Additionally, there are signs of greater dynamism in the labor market and rising wage growth. The press release noted that domestic credit demand is somewhat less dynamic, but did not refer to the recent deterioration of business and consumer confidence.

Core inflation remained low and stable, while volatile food and energy prices have lifted the headline figure from the start of the year. The central bank added that the medium-term (2 year) outlook for inflation remains anchored at the 3% target. In our view, this reference supports the previously stated position of the board that inflation is just transitorily low.

Intensifying risks to global economic growth, along with still contained inflationary pressures and some widening of the output gap in 1Q19 indicate no need to remove stimulus in the near term. Moreover, risks are tilted to an even longer-than-anticipated period of stable rates. 


Miguel Ricaurte
Vittorio Peretti



< Back