Chile: Neutral minutes with a catch

Chile: Neutral minutes with a catch

Nader Nazmi - Market Economics
Latam Macro Snapshot | 28 Nov 2012 16:32 |

We read the minutes of the 13 November monetary policy meeting as broadly neutral regarding the short-term outlook, ruling out any changes in the policy rate over the next several months. Although inflation is not an issue at present, the minutes show some concern about latent price pressures given the economy’s strong momentum.

As in the October meeting, the BCCh only considered the option of remaining on hold. According to the minutes, the policy rate remains within a neutral range and the decision to keep it steady at 5.0% for a 10th consecutive month was unanimous.

Notwithstanding the economy’s strong momentum (real GDP expanded 1.4% q/q, sa, or 5.7% y/y in Q3), both headline and core inflation remain in line with the inflation target's tolerance range. (Inflation was 2.9% in October, remaining below the mid-point of the central bank’s 2-4% tolerance range). Lower prices for tradable goods have helped. The services inflation has also been tame: so far there are no rising pressures on costs and wages. However, board members show concerns about latent price and wage pressures and one member flags increased labour shortages.

Domestic demand (both private consumption and investment) has been growing very quickly, outpacing a rapid rise in domestic output. However, this has not resulted in price pressures because increased imports have covered the excess of the domestic demand over the domestic output. The result has been increased pressure on the current account, a situation that has to be monitored closely.

Although the domestic demand is growing at a more rapid pace than expected, some board members anticipate a moderation going forward owing to a deceleration in credit growth and a tightening of lending standards by banks.

The board sees global risks broadly unchanged since its last meeting. The outlook for global growth is consistent with that presented in September’s Monetary Policy Report (IPoM) although the gap between the performance of the Eurozone and other regions has widened. Economic activity in China has stabilized but inexplicably this has not been reflected in prices for primary products, including copper. Risks related to a fiscal adjustment in the US persist.

According to the minutes, keeping the policy rate unchanged reaffirms the view that the balance of risk to the domestic and international economies remains balanced. A rate hike option is off the table because of “the delicate external situation” and a rate cut is inconsistent with the domestic economy’s strong growth momentum.

Nader Nazmi