Itaú BBA - CHILE - Monetary Policy Minutes: Analyzing its options

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CHILE - Monetary Policy Minutes: Analyzing its options

mayo 27, 2019

The introduction of rate cuts into the discussion highlights the potential change in course ahead

The minutes of the May monetary policy meeting show the board is reviewing its options amid growing uncertainty. Although all board members agreed maintaining rates at 3% was the preferred option, several stated that a neutral stance justified discussing all possibilities. Prior to the publication of the 2Q Inflation Report (IPoM; June 10), where the central bank will likely revise structural parameters (neutral policy rate and potential GDP), the board is reevaluating the appropriate path for monetary policy in a context of weakening domestic activity and elevated international risks.

The more negative tone for the international scenario and transmission channels were in focus. While growth in 1Q19 pointed to a limited risk of a sharper slowdown in developed economies, the board noted the heightened trade dispute between China and the U.S. All said, the board sees the impact of the international scenario as having a stronger transmission channel through terms-of-trade and international financial conditions, rather than growth of trade partners.

While demand-side sector growth is broadly in line with forecasts, the board noted uncertainty persisted with the evaluation of the output gap, with signs that it may be larger than anticipated. Immigration was pinpointed as playing a key role in how to evaluate the slack. Additionally, the central bank deemed the recent slump in imports of machinery and equipment as transitory, but the board could not rule out the possibility of weaker-than-expected investment this year. Despite risks from exchange rate depreciation, the board sees inflationary pressures contained. In all, a larger output gap could imply a smaller degree of monetary stimulus than originally intended, signaling that risks are tilted to more/longer monetary stimulus relative to its recent guidance.

All possibilities (cut, hold and hike) were discussed in May. Several board members easily dismissed the option to hike in the absence of supporting elements (growth or inflation that is more dynamic) and some signs of downside risks to the economic outlook. On the contrary, several in the board believed cutting rates was an option worthy of consideration. A rate cut could be justified as a preemptive measure amid the current domestic and foreign risks or in case that the monetary stimulus was smaller than originally intended. We note one board member objected discussing different rate trajectories relative to that outlined in the 1Q IPoM (stable rates until close to yearend) as the economic outlook contained in this report remained valid.

Ahead of the June IPoM, the central bank appears less convinced with its current baseline scenario of gradual tightening following a prolonged pause. The introduction of rate cuts into the discussion by numerous board members highlights the potential change in course ahead if the materialization of risks is seen more likely. Moreover, we note that possible revisions to the structural parameters next month will be key in setting the monetary policy path ahead. Particularly, in a scenario where the output gap is revised to be larger than envisioned or a lower neutral rate is validated, the scenario of extended stable rates or additional easing gains weight. Ahead of the IPoM publication, we expect the board to remain on hold at the June 7 MPC.

Miguel Ricaurte
Vittorio Peretti

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