Itaú BBA - CHILE – Monetary Policy Meeting Minutes: Preparing additional quantitative stimulus

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CHILE – Monetary Policy Meeting Minutes: Preparing additional quantitative stimulus

Maio 22, 2020

A larger external drag and recovery doubts consolidate the view that significant monetary stimulus is required to combat the shock

The minutes of the monetary policy meeting in early May show agreement amongst the board that the global economic outlook was worsening (compared to the assessment in the March Inflation Report), as there was greater uncertainty about the form, speed and results of the removal of the sanitary control measures both domestically and abroad. All board members highlighted an increase in credit to businesses as a key factor in averting permanent damage to the economy, but there remains uncertainty as to how effective credit programs have been in reaching those most at risk (eg. SMEs). Overall, the authorities acknowledge that given the unfavorable economic outlook, further monetary stimulus could be required. With the policy rate at its technical floor of 0.5% (and signals that it will remain at such levels for a prolonged period), the board will focus on a broader use of non-conventional policies to enhance the monetary impulse and support for financial stability.

A larger external drag and growing doubts on the pace of the recovery in 2H20 consolidate the board’s view that significant monetary stimulus is required to combat the shock. The board notes that the economic recovery would not solely come down to the evolution of the pandemic, but also as to how the health scare affects the decision-making of agents (e.g, resistance to returning to densely populated venues) and the response by the authorities (extend social distancing measures). Meanwhile, the weaker economic outlook posed a significant challenge to inflation converging to the target.

Under the current shock, the board is placing significant focus on financial stability measures that would aid a smoother recovery ahead once there is some normalization on the health front. A significant increase in credit was seen as essential to mitigate the costs from potential wide scale bankruptcy of companies. If the measures succeed, it would limit the destruction of jobs, aiding an economic recovery that would support an inflation convergence and prevent some unfavorable effects on the financial system. At the time of the meeting, available data was not conclusive as to whether the credit programs were effective. While there had been a significant increase in commercial credit demand from mid-March, doubts remained as to whether access to liquidity was reaching all sectors. The board also stressed that a slowing bond market from March was concerning, particularly considering the high dynamism during the start of the year. Thus, it noted that reactivating this market was vital not only to provide resources to large companies, but also to make room for smaller companies in the bank credit market. In raising caution over the credit line program, one board member stressed that setting the interest rate at its minimum for four years for a significant fraction of banks' loan portfolios would lead to implications for future monetary policy decisions. Therefore, it was of utmost interest that the liquidity measures were reaching the desired targets.

Apart from increasing liquidity to the financial system, the board also raised the challenge of getting credit providers to assume more risk. In this regard, reviewing the impact that the Covid-related credit lines with government guarantees would be key to evaluate the effectiveness of the programs. At the time of the meeting, the program had only just begun, but results from other countries showed the difficulties in successfully implementing these measures. 

We see the board retaining the policy rate at 0.5% for at least the next 12 months, while building on liquidity measures. Non-traditional monetary measures could include targeted liquidity lines and the purchase of securities. The effectiveness of such measures would also come down to how quickly they reach the intended targets. Hence, as the economy is in the midst of its most challenging period, we expect the board to announce additional support measures in coming weeks.


Miguel Ricaurte
Vittorio Peretti

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