Itaú BBA - CHILE – Monetary Policy Meeting Minutes: Additional easing is likely

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CHILE – Monetary Policy Meeting Minutes: Additional easing is likely

Março 30, 2020

We expect a 50bp rate cut to 0.5% at tomorrow’s monetary policy meeting.

The minutes from the extraordinary March 16 monetary policy meeting (which resulted in a 75-bp rate cut to 1.0% and significant liquidity measures) hint at more easing ahead, particularly if the operation of financial system is under strain. All five board members believe the current shock would have contractionary effects and reduce inflationary pressures in the policy horizon. Meanwhile, there was a significant risk of contagion between the real shock and the financial system. In a scenario that some businesses, particularly SMEs, are already in a vulnerable position following the October protest action and subsequent operational closures, the effects of the COVID-19 shock could lead to more persistent economic effects if not confronted. As a result, the appropriate response was to deepen monetary stimulus to limit the activity slowdown and counteract lower inflationary pressures; ensure the normal functioning of the financial system; and promote the flow of credit to the private sector to avoid permanent damage that could lead to a sharp unemployment rise.

There was no dissent regarding the need for a rate cut, but opinions varied on the appropriate magnitude of the move. The minutes noted that after announcing earlier on the same day the need for an extraordinary meeting, the market had moved to price in a 50-75bps rate cut, with no unexpected reaction to other variables, including the Chilean peso, easing the way for the intended action. All things considered, three of the five board members believed that the scenario called for a sooner-rather-than-later response in the form of a 75bps rate cut. On the other hand, the remaining two board members preferred caution on the rate front (50bps), so as to monitor the financial market response, while boosting the other measures that aimed to strengthen liquidity and credit evolvement. Overall, these two members believed large rate cuts amid high financial tension could affect the CLP (that could raise inflationary concerns), and hence favored a circumspect approach. 

Meanwhile, many board members noted that futures movements would be conditional not only on the macro evolution but also on the financial market behavior. Even the two board members backing a 50-bp move signaled they saw space for additional rate cuts down the road, pending on the impact of monetary loosening on markets. On Tuesday March 31, the board finalizes its scheduled March meeting at which we think further monetary policy easing would ensue. While part of the reasoning behind lower rates is the expectation that activity is set implode, another key factor is the interest rate attached to the central bank’s conditional financing facility to banks is set at the current policy rate. Therefore, lowering the policy rate further would help make the financing line more attractive and improve its effectiveness. In turn, the behavior of domestic financial markets, especially important given the wording of the minutes, gives room for more easing as the CLP is not underperforming and the yield curve implies a policy rate at 0.5% in coming months, with the most recent trader’s survey (published last Thursday) favoring a 50bp cut this week. Finally, there is a large gap between the March 31 meeting and the next scheduled gathering on May 6. The extended timeline favors acting early, in a bid to avoid having to call for another extraordinary meeting in April to address potential financial market strain.

We expect rates to reach 0.50% at tomorrow’s monetary policy decision. While we expect rates to stay at this historically low level for the remainder of the year, we cannot rule out additional monetary stimulus if risks for the economy increase even further.

Miguel Ricaurte
Vittorio Peretti

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