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Chile Monetary Policy March 2020

Chile: Central Bank braces for recession and slashes benchmark rate to over one-decade low in March

At its monetary policy meeting on 31 March, the board of the Central Bank of Chile (BCCh) slashed the monetary policy rate by 50 basis points to 0.50%, its lowest point since 2009.The decision, which was unanimous, reflected the need to minimize the economic challenges posed by the Covid-19 pandemic and came on the heels of a 75-basis-point emergency cut on 16 March.

The restrictions taken domestically to contain the pandemic are set to have pushed the economy into a severe contraction in the second half of March, which will likely spill over into the second quarter and add downward pressure on inflation. In turn, the Bank slashed the rate to its technical minimum and enlarged the additional liquidity measures deployed in the previous meeting through supplementary credit lines, more flexible collateral requirements and expanded its bank bond purchase program from USD 4.0 billion to USD 5.5 billion. The move displays a joint effort with the government to deliver stimulus through both monetary and fiscal channels.

Looking ahead, the Bank expects to maintain the policy rate at 0.50% for a long period of time. Inflation expectations have decreased significantly amid the fall in activity and the steep fall in oil prices, and is now seen converging to the 3.0% target in the next two years. The current measures should minimize the impact on financial markets, although a recession this year looks inevitable.

Reflecting on the Bank’s decision, Diego W. Pereira and Lucila Barbeito, economists at JPMorgan, noted:

“Today, the BCCh Board didn’t hesitate in trimming the policy rate by another 50bp, to 0.5%, in a unanimous decision. We were of the idea that the Board will be holding the rate stable, although we acknowledged it was a close call. But the Board weighed more the macro cyclicals that call for a deep recession (globally and domestically) and corresponding deflation pressures than the potential financial instability risks associated with the quasi-ZIRP policy rate amid still volatile global and particularly EM financial markets. Note that our denomination of quasi-ZIRP is associated to the fact that BCCh considers the 0.5% policy level a ‘technical minimum’. With the BCCh pulling out all the stops in terms of the policy rate, the forward guidance gets restricted to holding the “very expansive monetary accommodation stance for a long period of time.””

The next monetary policy meeting is scheduled for 5–6 May.

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