By CentralBankNews.info
Chile’s central bank left its monetary policy rate at 2.50 percent but said it “believes that the monetary stimulus should start being gradually withdrawn in the coming months” as economic growth has exceeded forecasts, reducing the output gap and thus making it more likely that inflation will converge to the bank’s target.
The Central Bank of Chile, which has maintained its rate since May 2017, also said economic activity int the second quarter and demand was stronger and more widespread than expected, with faster growth in trade, manufacturing and some services sectors.
Today’s warning of tighter monetary policy follows the bank’s board meeting in June when a 25-basis point rate hike was considered as the risks of inflation failing to rise to the target had decreased, according to minutes of that meeting.
Chile’s Gross Domestic Product grew by an annual 5.3 percent in the second quarter, much faster than expected and the fifth consecutive quarter of accelerating growth.
Inflation also rose in July to 2.7 percent from 2.5 percent in June, the highest since April last year but still below the central bank’s 3.0 percent target.
While the unemployment rate rose to 7.3 percent in July from 7.2 percent, the central bank said the labour market was beginning to show signs of recovery, with private salaried employment up by over 1 percent year-on-year for the second quarter in a row.
Along with most emerging market currencies, Chile’s peso has depreciated this year and was trading at 692.1 to the U.S. dollar today, down 11 percent this year.
The Central Bank of Chile issued the following statement:
The external scenario continues to be characterized by an increase in perceived risk in the emerging world, particularly for those economies seen as the most vulnerable. In recent weeks there has been a significant depreciation of emerging currencies, mixed movements in commodity prices, still negative capital flows and higher risk premiums. All this in a context where the divergence between monetary policies in the developed world persists and trade tensions between the United States and China have increased. Nonetheless, the outlook for global growth has limited corrections. In China, conjunctural economic activity figures have shown a sharper slowdown than predicted by the market, so the authority has activated several measures to boost demand.
In the local financial system, it is worth noting the further depreciation of the Chilean peso, which has been lower in multilateral terms. This has been in line with external developments, including the stronger US dollar at the global level, the fall in the copper price and intensified problems in some emerging economies. In this context, the almost null variation of long-term interest rates and local market risk indicators compared with the previous meeting stands out, opposing the movements seen in several economies. The domestic stock market coupled with slumps that have been observed in other emerging-countries’ stock markets. Domestic credit continues to be characterized by low interest rates and moderate growth in loan amounts, where the ongoing rise in the commercial portfolio deserves mention.
Second-quarter activity and demand data showed a better than expected performance of the economy that has spread to more sectors. Faster growth in trade, manufacturing and some services stands out. On the expenditure side, strong dynamism of investment in machinery and equipment was observed again, plus higher private consumption and significant inventory build-up. Although the unemployment rate has increased, the labor market has begun to show some signs of recovery. In particular, private salaried employment grew at rates above 1% annually for the second consecutive moving quarter. Business (IMCE) and household (IPEC) expectations, despite a marginal drop, remain in positive territory, and financial conditions are still comfortable. The private expectations for economic growth (EES) continue to point to growth of the order of 4% for this year and the following two.
In its decision the Board considered that the analysis contained in the September Monetary Policy Report and data collected after its statistical cutoff, point to the evolution of macroeconomic conditions that make less necessary to maintain the current monetary stimulus. Economic growth has exceeded forecasts, thus reducing the activity gap faster and consolidating the prospects of an earlier convergence of inflation to the target. Given the medium-term implications of this scenario, the Board believes that the monetary stimulus should start being gradually withdrawn in the coming months. Likewise, it reiterates its commitment to conduct monetary policy with flexibility, so that projected inflation stands at 3% in the two-year horizon.
The minutes of this Monetary Policy Meeting will be published at 8:30 hours of Monday 24 September 2018. The next Monetary Policy Meeting is scheduled to take place on Wednesday 17-Thursday 18 of October 2018 and the statement thereof will be released 18:00 hours of Thursday 18.”
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