Wednesday, January 29, 2020

Chile maintains rate, to assess policy stance in March

    Chile's central bank left its monetary policy interest rate steady at 1.75 percent for the second month to safeguard an expansionary policy stance as stated in December, with the policy report in March assessing the economic situation and the implications for inflation and monetary policy.
     As in December, the decision by the Central Bank of Chile's board was unanimous in its decision.
     Chile's central bank cut its rate three times last year by a total of 125 basis points between June and October but then said in December it would maintain the rate in coming months in light of increased fiscal spending following widespread social unrest and intervention in the foreign exchange market of some $10 billion after the peso fell some 15 percent.
     The massive protests over inequality, which led to the death of more than 25 people, had a strong impact on the monthly economic activity index, known as Imacec, in October and November but the central bank said some moderation of this impact could be expected in data for December, as it had anticipated in its latest policy report.
     Chile's inflation rate rose for the third month in a row to 3.0 percent, below the central bank's expectation, but upward pressures from the fall in the peso since October remain present.
     On the other hand, the outlook for activity remains weak and the recovery of the economy continues to depend on how economic agents respond to the new economic situation, the bank said.
      In December the central bank slashed its 2020 growth forecast to a range of 0.5 - 1.5 percent from  and earlier 2.75 - 3.75 percent

    The Central Bank of Chile issued the following press release:

"In its Monetary Policy Meeting, the Board of the Central Bank of Chile decided to hold the monetary policy interest rate at 1.75%. The decision was adopted with the unanimous vote of the Board members.
In the external scenario, the signing of Phase 1 of the trade agreement between China and the United States and the improved activity figures in the main economies had a positive impact on financial markets and commodity prices. However, the Coronavirus outbreak in China triggered a rise in the perception of global risk, which has translated into increases in risk premiums, a global appreciation of the dollar, and falls in stock markets, interest rates and commodity prices. The price of copper has been particularly affected.
Since the last meeting, domestic financial markets have shown volatility in line with the evolution of their internal and external fundamentals, and with the impact of the measures adopted by the Bank. As for banking loans, the marked deceleration of consumer credit stands out, while commercial and mortgage credit loans have shown no major changes in their annual expansion rates. At the same time, an important amount of corporate bond issues has been observed abroad, with favorable financial conditions. The Banking Credit Survey for the fourth quarter of 2019 reports that credit supply is perceived to have tightened, particularly in consumer and large company portfolios, and that demand had dwindled, particularly in the consumer segment. 
Regarding activity, fourth-quarter data confirmed that the disruptions caused by the social crisis had a strong impact on the Imacec in October and November, but some moderation could be expected in the December figure, in line with the baseline scenario of the last Monetary Policy Report. On the expenditure side, different sources reveal a noticeable contraction of the tradable components of private consumption, a further fall in annual terms of imports of consumer goods, retail inventories still perceived as too high, and consumer expectations that persist in markedly pessimistic territory. The latter occurs in a context where administrative data show an incipient deterioration of the labor market.
As for investment, business expectations remained pessimistic and capital goods imports have continued to contract in annual terms. The Capital Goods Corporation’ investment plans survey has shown no big changes in the amounts committed for this year and next. In this scenario, in January’s Economic Expectations Survey growth expectations dropped to 1.2% annually for this year and 2.5% for 2021.
In recent months, annual inflation rose to 3% and the core measure remained at around 2.5%. Both fell short of expectations estimated in the December Report. The evolution of inflation continues to be exposed to opposing forces, whose relative impact is still uncertain. On the one hand, the pressures inherent in the idiosyncratic depreciation that the peso has accumulated since October are still present. On the other hand, the outlook for activity remains weak and its recovery continues to depend on the economic agents’ response to the changed scenario. Inflation expectations remain at around 3% two years ahead.
The decision to maintain the MPR at its current level is consistent with safeguarding the expansionary stance of monetary policy, as communicated by the Board last December, considering the evolution of the macro scenario and the set of extraordinary measures adopted. The March Monetary Policy Report will assess the macroeconomic situation and its implications for inflation and the monetary policy trajectory. The Board reaffirms its commitment to conduct monetary policy with flexibility, so that projected inflation stands at 3% over the two-year horizon.
The minutes of this Monetary Policy Meeting will be published at 8:30 a.m. on Thursday, 13 February, 2020. The next Monetary Policy Meeting will be held on Tuesday, 31 March and the statement thereof will be published at 18:00 hours the same day."


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