Itaú BBA - CHILE – Monetary Policy Meeting: Stable for some time

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CHILE – Monetary Policy Meeting: Stable for some time

Dezembro 4, 2019

An uncertain inflation path amid opposing pressures inspired caution

As we had anticipated, the central bank opted to keep the policy rate stable at 1.75% in a unanimous decision (Bloomberg market consensus edged to a 25bp rate cut). Meanwhile, the board dropped the easing bias and signaled stable rates during the coming months “in a context of exchange rate intervention and fiscal stimulus”. Given broadly unchanged global dynamics (steady long-term interest rates, the multilateral dollar and commodity prices), domestic developments expectedly dominated the monetary policy discussion.

The board noted that the social unrest raised uncertainty, resulting in depreciation of the CLP, greater country risk perception (CDS +20pp since October 18), a deterioration of the stock market (-10%) and rising fixed income rates and corporate spreads. As a result, the board’s response over the last few weeks was to enhance market liquidity (through dollar swaps and peso repo operations) and limit the excessive FX volatility with the USD 20 billion intervention program.

The growth outlook has deteriorated considerably. Without revealing its updated forecasts (to be shown in Thursday’s Inflation Report), the central bank is likely to significantly cut its 2020 range forecast of 2.75%-3.75% (established in 3Q19). It notes that the labor market has already shown signs of loosening (likely referring to the 0.6pp jump in the Greater Santiago unemployment rate and increased registrations of dismissals by companies due to economic hardships). We note labor market numbers would only worsen ahead, while a swift recovery given the deterioration of expectations is unlikely in spite of the significant fiscal impulse announced.

An uncertain inflation path amid opposing pressures inspired caution. The board highlights the response of market participants to the expected pass-through of the Chilean peso depreciation to consumer prices by yearend with inflation seen close to, or above 3% (from the 2.5% inflation reading in October). The relevant two-year ahead inflation expectations remain anchored at the 3% target, according to a range of measures. In spite of well-behaved inflation expectations, the board focused on the two factors expected to drive inflation ahead. A widening output gap would lead to lower demand-side pressures, while FX related cost-push pressures have risen, particularly due to the idiosyncratic nature of the currency depreciation (which the central bank has previously estimated could be larger than under external shocks). The board noted it remains premature to determine which of the two forces will dominate. We highlight that based on traditional external fundamentals (DXY, copper, regional currencies), the CLP near 720 per US dollar would be fair value, so current levels are a reflection of the domestic uncertainty (CLP closed at 791 per US dollar prior to the meeting).

In the coming months, we see rates stable at 1.75%. The central bank would bide its time and review how uncertainty, volatility and inflation evolve. If volatility dissipates ahead (specifically related to the FX), mitigating upside inflation risks and allowing the central bank to significantly reduce intervention, we believe increasing the monetary stimulus to a dire activity environment would have appeal.

 

Miguel Ricaurte
Vittorio Peretti



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