Excerpts from the Central Bank of Chile's press release:
On the external front, since the previous meeting growth forecasts for the main economies have continued to be downgraded. In this scenario, the Federal Reserve and the European Central Bank have reinforced their stance for a more expansive monetary policy while the Chinese authorities have added new stimulus measures. In addition to adjustments to its balance sheet, the Federal Reserve also announced that it would not raise the federal funds rate this year and that the direction of its next move cannot be foreseen with clarity. Even though all these announcements have significantly reduced long term interest rates, tensions in international financial markets have reappeared. The yield curve has inverted, the dollar has appreciated globally and news fears about the performance of some emerging economies whose economic fundamentals are perceived as weak have arisen. Commodity prices have been less affected. Specifically, the current price of copper is still above the one observed at the time of January’s meeting.
Regarding local financial conditions, the peso, as the majority of emerging market currencies, experienced significant fluctuations since the previous meeting. Measures of domestic financial risk remained contained. Aligned with global trends, the stock market and interest rates fell. In the local bank credit market, loans continued growing in real terms while lending rates remain low in historical perspective.
The annual growth of the CPI – according to the base 2018=100 reference series- is at 1,7% in February (CPIEFE: 2%), below what was forecasted in the last Monetary Policy Report. Beyond the direct impact of the new CPI basket and methodology, a number of macroeconomic phenomena seem to explain this difference. A lower than expected exchange rate pass-through and more competition in some markets are among them. An evaluation that capacity slack is bigger than previous estimations, what to a significant extent appears to be related to the effects of immigration in the labor force, is another factor. In the last months, private sector inflation expectations for the short term have been reduced while the ones for December 2019 have seen a smaller reduction. At the two-year horizon, they are around 3%.
The Board’s decision considered that, according to the analysis in the Monetary Policy Report and the recent data, the lower level of inflation and its perspectives, require keeping the monetary stimulus for a longer time. Notwithstanding, it still estimates that towards the medium term it will be necessary to resume the normalization of the monetary policy rate to assure the convergence of inflation in the policy horizon. With this, the Board reaffirms that it will proceed gradually and cautiously as has been stated and reiterates its commitment to conduct monetary policy with flexibility so that projected inflation stands at 3% over the two-year horizon.