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CHILE – Monetary Policy Meeting: Rates on hold amid uncertain inflation path

Janeiro 29, 2020

Our expectation of rates cuts depends on the impact of the Chilean peso on inflationary pressures

The board of Chile’s central bank unanimously voted to hold the policy rate at 1.75%, as expected by the market. The communiqué retained a neutral stance, signaling stable rates for at least this quarter as it accumulates additional information as to how the economy responds to recent disruptions. An update to the baseline scenario will take place in the March Inflation Report (IPoM), with the key area of uncertainty linked to the inflation path. 

Developments on the international front have been mixed. Risks diminished following the phase one trade pact with between the world’s two largest economies, but the rapid spread of the coronavirus raised global growth concerns. As a result, the risk-off market mode led to a strengthening of the US dollar, declining stocks, interest rates, and commodity prices (with copper particularly affected). We note that the resultant peso volatility would not reignite the FX intervention program given the systemic nature of the movements versus the idiosyncratic characterization at the close of last year.

To-date, inflationary pressures have underwhelmed the central bank, but doubt persists. The board expected inflation to end 2019 at 3.4%, while the outcome was 3.0% (in line with the central bank’s target). Core inflation was stable at 2.5%, also below expectations. Nevertheless, the board highlights the two opposing forces, the upside pressure from accumulated CLP depreciation along with contained demand-side pressure as growth wanes, which cloud the expected inflation path. Regardless of these developments, medium-term inflation expectations remain anchored at the target. 

Activity weakness has been in line with expectations. A sharp activity decline in October and November, the peak protest period, was expectedly followed by some normalization at yearend. On the consumption front, the central bank notes the weakness of consumer goods imports, high levels of inventory, downtrodden sentiment, signs of labor market loosening and the deceleration of consumer credit growth. Regarding investment, the board highlights falling capital goods imports and historically low confidence, but notes that the Investment Corporation’s (CBC) portfolio of potential projects planned for this year and 2021 has not changed significantly.

Our base case shows room for the central bank to loosen monetary policy further as concerns for inflation ease and growth remains weak. We expect an additional 50 bps of easing, to 1.25%, by yearend. Rate cuts are unlikely in the short term, given that the board will likely want to see how the currency performs without additional intervention (set to end on May 29) in the face of lingering domestic risks, the evolvement of inflation, and the impact of fiscal stimulus on internal demand.
 

Miguel Ricaurte
Vittorio Peretti



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