Chile: Steady Rate as the Only Option, Despite Concerns

Chile: Steady Rate as the Only Option, Despite Concerns

Nader Nazmi - Market Economics
Latam Macro Snapshot | 01 Mar 2013 19:19 |

Neutral rate and stance. We read the minutes of the 14 February monetary policy meeting as broadly neutral regarding the short-term outlook, ruling out any changes in the policy rate for now. According to the minutes, the policy rate remains within a neutral range and the decision to keep it steady at 5.0% was unanimous.

External risks in line with expectations. The board sees global risks broadly unchanged since its last meeting. The outlook for global growth is consistent with that presented in the latest Monetary Policy Report (IPoM) although risks stemming from the Eurozone’s fragile situation persist. There are also risks related to a fiscal adjustment in the US and rapid growth deceleration in China.

Growth is rapid. The minutes underscore the fact that the labour market and domestic markets remain tight. A moderation in domestic demand growth that the board has been anticipating is not materializing. Indeed one board member pointed out that the risk that domestic demand will continue growing faster that potential GDP has increased due to improvements in labour market conditions, consumer confidence and better credit availability as well as a strong rise in private investment. The board took solace in the fact that Q4 2012 growth has shown signs of deceleration. This situation, however, has changed since the board’s February meeting as recent data releases point to growth reacceleration in Q1.

Imports and current account as release valves for domestic demand pressures. 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 as it “could be a source of external vulnerability."

Inflation is not an issue at present. Notwithstanding the economy’s rapid growth of 5% to 6%, inflation (1.6% in January) remains below the floor of the bank’s 3.0%±1.0pp target range. However, the minutes show some concern about latent price pressures given the economy’s strong momentum.

Remaining on hold is the only option. According to the minutes, the option of increasing the policy rate is constrained by external factors (global risks and ultra-expansionary monetary policy abroad), much higher local interest rate than foreign interest rate, as well as low inflation. A rate cut, on the other hand, is inconsistent with the domestic economy’s strong growth momentum.