Itaú BBA - Evening Edition – Chile cuts rate by 75bps in extraordinary meeting

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Evening Edition – Chile cuts rate by 75bps in extraordinary meeting

Março 16, 2020

Going forward, further monetary policy easing cannot be ruled out

Talk of the Day


The central bank of Chile followed in the footsteps of global counterparts in increasing monetary stimulus and liquidity measures in an effort to ensure the normal functioning of credit markets and limit the impact from the coronavirus shock. The policy rate was cut by 75 bps to 1.0% in an extraordinary meeting more than two weeks ahead of schedule. The decision was not unanimous as two of the five board members (Alberto Naudón and Rosanna Costa) backed a 50bp rate cut. Additionally, the central bank announced several liquidity measures (with unanimous support from the board): the availability of a conditional financing facility to banks to help increase loans, the possibility of using corporate bonds as collateral in transactions between the central bank and financial institutions, the launch of a bank bond purchase program and the extension of November’s foreign exchange program from the end of May to January next year. The moves are in line with the expectation that Chile’s economy is set to be unfavorably affected by the two-pronged nature of the shock (both to demand and to supply).

The Chilean central bank’s move was supported by generalized monetary policy action in the developed markets. The global expansion of COVID-19 and the associated financial turmoil led the Fed to lower its policy rate to 0%-0.25% and committed to purchasing up to USD 700 billion of government bonds and MBS in a return to a policy stance not seen since the global financial crisis. While economic data has yet to incorporate the effects of global disruptions stemming from COVID-19, the rate of the advancement of the virus within Chile and the subsequent measures being taken to combat the outbreak suggest that impact on sales and cash flows of companies could be significant and, if sustained, would negatively impact economic activity and the labor market even after the outbreak ends. Chilean officials reported 155 confirmed cases of COVID-19 as of today, more than doubling from the 75 cases stated yesterday. President Piñera announced the closure of Chilean borders for personal travel, in addition to measures announced over the weekend that include the forbidding of gatherings of more than 200 individuals, and the closure of the schooling system for two weeks. 

Beyond cutting the policy rate, the board adopted a set of measures to ensure the normal functioning of the credit markets and an effective transmission of the larger monetary impulse. First, a conditional financing facility (FCIC) will be opened to banks to boost loans. This facility would be operational for the next six months, with four-year credit terms. The initial loan amount would be 3% of the commercial and consumer portfolio as of the end of February (so around 1.5% of GDP). An additional loan amount channeled through the FCIC will be proportional to the increase in the placements of each institution, with respect to its base portfolio. The interest rate on the loans would be the policy rate at the time (currently 1%). Second, corporate bonds will be included within the eligible collateral for all current liquidity operations of the central bank in pesos. Third, a purchase program of bank bonds will be initiated to the participants of the Open Market Operation System for an equivalent amount in UF (inflation indexed unit) of up to USD 4 billion dollars (another 1.5% of GDP). Finally, the term of the foreign exchange sales program will be extended until January 9, 2021. The program was originally set to expire in May. The package is up to USD 20 billion dollars split evenly between NDFs and spot operations. To-date, USD 4.5 billion NDFs and USD 2.5 billon spot sales were undertaken.

Going forward, further monetary policy easing cannot be ruled out. Despite some board members being more cautious, the expectation that growth for this year will likely come in well below the 1.2% recorded last year (4% in 2018), and the fact that tradable inflationary pressures (on the back of the exchange rate weakening) are offset by a widening negative output gap, we cannot rule out additional rate cuts ahead (next MPC remains scheduled for March 31). We note that during the global financial crisis, the Chilean central bank brought the policy rate to an all-time low of 0.5% and adopted quantitative easing measures to bring long-term yields down. ** Full Story here.


By mid-March, analysts expected higher inflation, but stable rates for longer. According to the central bank’s monthly analyst survey, the 2020 inflation expectations edged up to 3.44% (3.34% previously; Itaú 3.3%). The upwards revision prevailed throughout the forecast horizon, with the 1-year horizon inflation outlook ticking up to 3.54% (3.43% previously), while 2021 yearend inflation is now seen at 3.24% (from 3.19%), and the 2-year measure moving up from 3.10% in February to 3.30%. Expectations for core inflation measures (excluding food prices) remained broadly stable at 3.35% for a 1-year horizon, while increasing only slightly at longer horizons, but stayed close to the 3% target. Despite a slightly more acid inflation outlook and the recent global events, analysts delayed the expected 25bp rate hike to 4.50% to April 2021 (previously expected for December 2020). The rapid deterioration of the global scenario, which has triggered a sharp depreciation of the currency amid deteriorating terms of trade and a wide current account deficit, will put the central bank at cross roads regarding monetary policy in coming months (next meeting: March 27), while the majority of its peers increase the monetary stimulus to aid activity.


The government has just released a series of measures to help contain the coronavirus impacts. The package is divided in three groups. The firs aims at helping the most vulnerable population by (i) early payment in May of second half of the annual additional wage (the so called “13th wage”) of public (INSS) pensioners, totaling BRL 23 billion – adding to the already-announced early payment of the first half of this additional wage, to be payed in April, which also amounts to BRL 23 billion; (ii) partial release of resources from worker´s severance fund (FGTS), totaling BRL 21.5 billion; (iii) early payment of the bonus wages (“abono”) in June, which is a benefit paid for workers who receive up to two minimum wages, totaling BRL 12.8 billion. (iv) including about one million new participants in the “Bolsa Familia” aid program.

The second group is focused on measures to mitigate the impact on employment. Company FGTS duties will be deferred by 3 months, with an impact of BRL 30 billion. The portion of the small business tax rate that goes to the Central Government (Simples Nacional) will be also deferred by 3 months, with an impact of BRL 22.2 billion. More than BRL 5 billion in credit (PROGER/FAT) directed to micro and small business. There will be a reduction of 50% in contributions to the S system (a special regime of taxes for small business), for 3 months (totaling BRL 2.2 billion). Simplifications on credit requirements and renegotiation are also part of the package. Finally, simplification of bureaucracy regarding imports of industrial inputs.

The measures of the third group are directly focused on fighting the pandemic: (i) Destination of the DPVAT (mandatory vehicle insurance) resources to the Public Health System (SUS), totaling BRL 4.5 billion; (ii) Temporary reduction of tax on health products related to the COVID-19.

The National Monetary Committee approved two measures to aid the economy against the negative effects of the coronavirus. The first measure facilitates the renegotiation of credit operations for companies and families with good credit history, allowing adjusts in their cash flows, which will contribute to mitigate the effects of the economic slowdown. BCB’s estimates shows that proximally BRL 3.2 trillion in credit will be allowed to benefit from this action. The second measure expands the utilization of capital capacity of the banking system by increasing the difference between the effective capital and the minimum capital required during the period of one year, which grants more room and security for the banks to maintain or amplify their credit plans. This action increases the flexibility of capital in the financial system by BRL 56 billion, allowing credit capacity to expand around BRL 637 billion during the period.

Paper cardboard dispatches dropped 2.3% mom/sa (+3.9% yoy)in February (our seasonal adjustment). The 3-month moving average also receded 0.2%. This release is important for our industrial production forecast (February), which increased to -0.2% mom/sa (from -0.3% mom/sa). 

Coronavirus update: the latest official information is that Brazil has 234 confirmed cases of coronavirus.

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