Itaú BBA - CHILE – Monetary Policy Meeting: Low-for-long rates, with additional stimulus on hand

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CHILE – Monetary Policy Meeting: Low-for-long rates, with additional stimulus on hand

Maio 6, 2020

Given the economic outlook, we expect rates to remain at their technical minimum throughout the year

The central bank kept the policy rate at its technical floor of 0.5% with the board reiterating the need for a highly expansionary position for an extensive period to ensure the convergence of inflation to the 3% target. The decision had the full support of the board and was unanimously expected by the market. Additionally, the board will continue to evaluate options to intensify the monetary impulse and support financial stability through unconventional instruments in the case of further deterioration of the economy. We note that this could include targeted liquidity lines and the purchase of securities.  

Signs that the global recession could be harsher than internal estimates. The board notes that the evolution of the coronavirus and the adoption of mitigation measures remain the key drivers the macroeconomic scenario. The central bank added that some public and private forecasts for the global recession this year exceed internal estimates and that data from some countries for 1Q20 have indeed shown deeper retreats than anticipated, while the labor markets are loosening significantly. The board sees it reasonable to think that the sanitary containment practices would persist for a meaningful part of 2Q20. As a result, monetary and fiscal authorities around the globe have increased stimulus measures to protect employment, income and cash flows that would aid an economic recovery in 2H20. Such measures have also contained the financial market deterioration. Thus, there are lower risk premiums, increases in the stock markets, some appreciation of the currencies against the dollar, and decreases in long-term interest rates in a relevant group of economies. Commodity prices have also shown a recovery, particularly metals. Nevertheless, the board highlights significant levels of uncertainty that come from both health and economic fronts.

Domestically, the decline of the GDP monthly proxy (3.5%) in March was in line with the 1Q20 baseline scenario. The contraction reflects the first effects of the health shock on the economy, concentrated principally in service industries. Data points to a significant deterioration in the labor market, partially cushioned by measures adopted by the Government. Consumer sentiment fell to record lows and consumption of non-essential goods has fallen dramatically. Business confidence also deteriorated. Data from the Investment Corporation (CBC) shows projects being delayed, while sharp declines in imports of capital goods reaffirms the likelihood of a significant drop in investment. The central bank notes that market expectations are for a notable activity contraction this year, followed by a swift recovery in 2021. Medium-term inflationary pressures continue to be contained (at the 3% target) as the expectation of a widening output gap and oil price drop offset CLP depreciation.  

The central bank’s QE and loan facilities continue to unfold, easing liquidity constraints. Regarding credit to companies, there has been a significant increase of commercial loans in March and April, led by large enterprises borrowing. The needs of SMEs lean more towards working capital. Meanwhile, consumer credit is declining. Around 50% (USD 12 billion) of the central bank’s loan fund to banks has been accessed, while the bank bond purchase program has accumulated USD 3.3 billion of the available USD 8 billion. Central bank debt repurchase reached just over USD 5.6 billion. In total, the above-mentioned measures amount to nearly 8% of GDP.

Given the economic outlook, we expect rates to remain at their technical minimum throughout the year. Furthermore, we cannot rule out the use of additional monetary tools to preserve the correct transmission of monetary policy and facilitate credit flow to companies and individuals in need of funds to overcome this challenging period.

 

Miguel Ricaurte
Vittorio Peretti



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