Itaú BBA - CHILE – Monetary Policy Meeting Minutes: Stable rates in the short-term, rate cuts possible afterwar

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CHILE – Monetary Policy Meeting Minutes: Stable rates in the short-term, rate cuts possible afterwar

Dezembro 19, 2019

We expect rates on hold in coming months. However, a weak activity and higher unemployment rate ahead mean rate cuts remain possible

The minutes of the December monetary policy meeting show there was consensus among board members regarding stable rates at 1.75% not only at this meeting, but for “several” months. The rationale behind the strong forward guidance for rates was that it would allow the technical staff to accumulate more information on the economic outlook. Moreover, the board noted that both rate hikes and cuts were possible going forward, depending on the state of the economy and the inflationary outlook. However, when debating policy options all board members agreed that monetary policy should retain a “strong expansionary tone” amid the expected GDP and employment contractions, suggesting in our view that the probability of cuts are larger than that of hikes, especially if the USDCLP stabilizes. Furthermore, one board member noted that shocks in the past that implied FX weakness and activity contraction led to increased monetary stimulus, but he also agreed that the level of uncertainty this time around indicated rates on-hold are the prudent response. 

The domestic shock added significant uncertainty to the economic outlook, demanding a deep analysis in coming months. This had led the central bank to respond to financial market stress by improving liquidity and intervening the FX market to decrease volatility. With information available at the time of the meeting, the board expected activity to contract 2.5% in 4Q19 and to grow a weak 0.5%-1.5% next year, affected not only by the considerable activity disruptions, but also by the sharp confidence deterioration. The already expansionary monetary policy stance and the fiscal stimulus would contain further deterioration. Going forward, the expected activity improvement in 2021 assumed a gradual dissipation of uncertainty, in the absence of which growth would remain weak for several years.

A persistent depreciation of the CLP increased inflationary pressures over the forecast horizon. Countering this effect would be that of a weak domestic demand. However, the board remained unclear about which effect (the impact of an idiosyncratic depreciation of the currency or a widening output gap) would dominate the evolution of inflation in coming quarters.

Four factors already listed in the statement announcing the decision were behind keeping rates on-hold. The level of monetary stimulus was deemed consistent with the cyclical weakness of the economy, the elevated uncertainty, and the fiscal stimulus announced by the authorities. Also supporting stable rates was the fact that board members saw the need for monetary policy to be consistent with the intervention scheme, while rate cuts could lead to an undesired spike in FX volatility. On the contrary, increasing rates would be inconsistent with the 4Q Inflation Report (published the day after the decision) outlook, which did not foresee rate hikes (towards neutral levels) for some time. 

We expect rates on hold in coming months, consistent with the guidance of the central bank. However, a weak activity and higher unemployment rate ahead mean rate cuts remain possible, if exchange rate stabilizes without the need of strong intervention. 
 

Miguel Ricaurte
Vittorio Peretti



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