Itaú BBA - CHILE – Monetary Policy Meeting: Toning down the bias

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CHILE – Monetary Policy Meeting: Toning down the bias

January 30, 2019

We expect a gradual normalization cycle, with risks tilted to fewer hikes

The board of the central bank unanimously opted to raise the policy rate by 25bp to 3.0%, as widely expected. This is the second hike in the normalization cycle, following last October’s increase of the same magnitude. The board continues to see the domestic economy consistent with the scenario outlined in the 4Q18 Inflation Report (IPoM), as activity remains robust and output gap-sensitive inflation measures are gradually rising. However, the press release announcing the decision toned down the tightening bias, due to weaker-than-expected growth in the core economies (leading to a more accommodative monetary policy stance by the main central banks).  

The board remains upbeat about domestic activity. The press release highlighted strengthening credit demand in 4Q18, strong investment indicators, stable wage growth (at 4%), while acknowledging some weakening in durable consumption performance. In turn, the relevant core inflation measure (which excludes food and energy) continues on an upward trajectory to the 3% target.

However, in the concluding remarks, the board mentions that the 1Q19 IPoM (to be published April 1) will place special focus on the evolution of the international scenario and how this could affect the convergence of inflation to the target. The press release notes the deteriorating growth expectations for developed economies and the signaling of a more gradual normalization process of monetary policy globally. If the central bank considers the worsening global outlook to have a significant negative impact on the small open Chilean economy, the board could favor an even more gradual normalization process (relative to the 4Q18 IPoM).

We also note that the board dropped the reference to a “highly expansionary” monetary policy position that was highlighted in the December communiqué. The board’s previous evaluation on the degree of monetary stimulus came amid an output gap that had narrowed significantly.

We retain our view of a gradual normalization cycle, with risks clearly tilted to fewer hikes. Moreover, the timing for future rate hikes appears to be more data dependent now. However, as the policy rate remains far from neutral levels (4.0%-4.5%), and the central bank views the output gap near closed, the continuation of a gradual tightening process is justified.

Miguel Ricaurte
Vittorio Peretti

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