Itaú BBA - CHILE – Monetary Policy Meeting Minutes: No option but to cut

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CHILE – Monetary Policy Meeting Minutes: No option but to cut

junio 24, 2019

Given we hold a less optimistic outlook on growth (and hence subdued inflation ahead), we expect further easing.

The minutes of the June decision to cut the policy rate by 50bps to 2.5% show the board debated on whether to implement the cut in one move or in two 25bp steps. Given the macroeconomic effects of the two strategies were deemed practically identical, the decision was a tactical one. The minutes reiterated the view that no for further easing is needed, justifying the communication of a neutral bias, and the signaling that the next rate movement would depend on the certainty regarding inflation converging to the target. This month’s minutes are shorter than usual given it follows the flagship 2Q Inflation Report and an atypically longer press release.

An upward revision to potential growth and a lower neutral rate, convinced all board members to increase monetary stimulus. Additionally, low activity dynamism in 1Q19 meant a wider and more persistent-than-expected output gap. Meanwhile, the worsening of global conditions and a lower neutral policy rate, compounded the need to cut rates.

Lowering the policy rate by 50bps received full support within the board, while the strategy needed fine-tuning. The option of staying on hold and signaling an even longer period of stable rates was deemed insufficient. Alternatively, the board could increase the monetary stimulus with a 25bp reduction and an easing bias indicating another movement of the same magnitude. The main advantage of this strategy was the perception of a lower communicational cost as it reduced the risk of the move being interpreted as an overreaction to the macroeconomic scenario. Several board members noted the staggered rate cut option was not immune to communicational costs as it could convey either some conditioning of the second cut or imply a cycle of more than 50bps is required (neither of which were consistent with the new baseline scenario).

The one-off 50bps rate cut was expected to surprise; hence the focus was on detailing the combination of factors that supported the move. In particular, the upward revision of potential growth, along with a drop in the neutral rate, in a context of low inflation and economic slowdown supported the unusual move. The board agreed that considering the surprising decision, it was beneficial to include additional information in the press release, including the outlook for activity and inflation.

In the second year following a scheduling change that reduced the frequency of policy meetings from 12 to 8, the board expressed that moves of a larger magnitude could become more frequent. The additional time to collect data between meetings could support larger movements (despite this not being the case for the June meeting). On that note, the board added that during a normalization cycle, a hike of 50bps should not be viewed as fear of a near inflationary outbreak.

Given we hold a less optimistic outlook on growth (and hence subdued inflation ahead), we expect further easing. We see the policy rate at 2% by yearend.


Miguel Ricaurte
Vittorio Peretti



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