Itaú BBA - CHILE – Monetary Policy Meeting Minutes: Uncertainty keeps the board in wait-and-watch mode

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CHILE – Monetary Policy Meeting Minutes: Uncertainty keeps the board in wait-and-watch mode

Fevereiro 13, 2020

Subtle signal that further loosening could once again become part of the discussion

The minutes of the unanimous decision in January to hold the policy rate at 1.75% show elevated uncertainty is restricting the possibility to plot a course of action for the policy rate trajectory over coming months. Downbeat expectations for the economy would hold back the activity recovery, while doubt over which inflationary force would dominate in coming months (accumulated idiosyncratic CLP depreciation pressures or weakening internal demand) favor the accumulation of more information before the board alters its current on-hold stance. Nevertheless, there was a subtle signal that further loosening could once again become part of the discussion as one board member highlighted that the risk of having an inflation rate below the target could become significant in the coming quarters.

The board acknowledged that the volatility of the domestic macroeconomic scenario had decreased significantly since the December meeting. Behind the moderation was the dilution of protest action, the extraordinary measures implemented by the central bank (FX intervention and other liquidity measures) along with the favorable market response to the first phase of the US-China trade agreement and signs of activity stabilization in developed economies. However, the latter was recently eclipsed by the coronavirus crisis and concerns on how it could affect global activity. The board evaluated favorably the effectiveness of the FX intervention and government sales of USD-denominated holdings, as they had helped avoid an excessive strain on the domestic financial market from investment portfolio adjustments. The board also noted that it should closely monitor how investors perceive Chilean risk, as a negative developments would have a stark impact on the local economy.

Activity is unfolding in line with expectations, but clarity on some factors needs to be determined. For example, what contribution the fiscal expansion would have on the cycle was not clear as tensions could arise between short-term needs and medium-term fiscal sustainability. Another issue was the rapid deceleration of consumer loans, amid tightening credit conditions, reflecting greater caution by consumers and credit institutions. The board also noted several data sources pointing at signs of a labor market deterioration. Considering the vital role that consumption has on internal demand growth, its evolvement would be at the forefront of the board’s considerations. On the investment front, signals were unclear as confidence (and imports of capital goods) deteriorated significantly, while credit creation remained at reasonable levels, projects listed at the Investment Corporation (CBC) are broadly unchanged, and mining-related investment growth stayed upbeat. Overall, the central bank emphasized that risks of a further weakening of the economy persist. 

Inflation in coming months would remain a conundrum. Inflation last year of 3.0% was 0.4pp below the central bank’s expectation (published only a few weeks prior to the data release). While the board noted that the surprise did not signal a substantial change in the medium-term outlook (due to the behavior of some volatile prices), it acknowledges that it did raise an alert. The key concern is that underwhelming inflation could mean that the pass-through from recent (idiosyncratic) CLP depreciation is less intense than expected or that disinflationary pressures were more severe than anticipated. A better assessment would be made in the 1Q20 Inflation Report once more data was collected. We note that since the last meeting, the January inflation print revealed signs that pass-through was unfolding. Inflation expectations remained near the 3% target in the medium-term.

We expect Inflation to remain elevated in coming months, closer to 4%, but weakening internal demand would aid a moderation to 3.3% by yearend, below the central bank’s current 3.5% forecast. Overall, caution regarding future rate moves will prevail in the short term as the board opts to accumulate and digest additional information. Although we still expect more easing later in the year (to 1.25% by year-end), we note that the risks tilt toward stable rates given the domestic uncertainties and the central bank’s already-expansionary monetary policy stance.


Miguel Ricaurte
Vittorio Peretti

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