Monetary Policy Meeting 1 / JANUARY 2015

Transcription

1 1 / JANUARY 2015 CENTRAL BANK OF CHILE 1 / This is a translation of a document originally written in Spanish. In case of discrepancy or difference in interpretation, the Spanish original prevails. Both versions are available at

2 MINUTES OF THE MONETARY POLICY MEETING Monetary policy meeting No. 218, held on 15 January Present: Rodrigo Vergara, Governor; Enrique Marshall, Vice-Governor; Sebastián Claro, Board member; Joaquín Vial, Board member; Pablo García, Board member. Present the Finance Minister, Alberto Arenas. Also present: Alejandro Zurbuchen, General Manager; Mauricio Álvarez, acting General Counsel and Attestor; Alberto Naudon, Research Division Director; Beltrán de Ramón, Financial Operations Division Director; Ricardo Vicuña, Statistics Division Director; Miguel Fuentes, Macroeconomic Analysis Manager; Diego Saravia, Economic Research Manager; Matías Bernier, Domestic Markets Manager; Rodrigo Alfaro, Financial Stability Manager; Luis Álvarez, Communications Manager; Enrique Orellana, Strategy and Communication of Monetary Policy Manager; Claudio Soto, Advisor to the Finance Minister; Tatiana Vargas, Senior Economist; Natalia Gallardo, Economic Analyst; Marlys Pabst, Secretary General. 1. Background and options Both the background information and the presentation prepared by the Research Division, based on publicly available information, may be accessed on the Bank s website 2 /. During the past month, the main news came from abroad. In particular, the continuing decline of commodity prices that took WTI oil below US$50 per barrel and copper near US$2.5 per pound. Although these movements meant deviating significantly from the figures in December s Monetary Policy Report, it was premature to assess its medium-term economic implications internationally and domestically, which would depend critically on the persistency and relative composition of the underlying supply, demand, and purely financial factors. 2 / Anyway, the latest correction to commodity prices had been associated with higher uncertainty, mainly because of the potential short-term financial effects this situation could generate. This, coupled with developments in Russia and Greece, had had negative effects on the financial conditions of emerging economies, Chile included. Emerging countries sovereign spreads had risen, capital flows had diminished, and stock markets had been revised downwards. Accordingly, the currencies of these economies, especially those more intensively based on commodities, had depreciated against the dollar. The flip side of the coin was the drop in long-term interest rates in developed economies whose assets acted as safe havens in these conditions. The low levels of the US long-term interest rates, while helping to mitigate the rising sovereign premiums, increased the risk associated to a sudden reversal of this variable. On the other side, the lower fuel price had resulted in reductions in both actual and expected inflation around the world, which together with the ever more likely adoption of a quantitative easing program in the Eurozone, had helped to further strengthen the dollar. In this context, it was very likely that in the short run there would be episodes of increased financial volatility and new depreciations of emerging currencies. Despite the risks and uncertainties relating to these changes, incoming data suggested that the world economic outlook contained in the December Report continued to hold. The US economy was looking strong and the Eurozone would be able to grow at a moderate pace. Financial conditions, while not as comfortable as before, were still favorable and the prices of oil and copper were expected to return to their long-term values within 18 to 24 months. Thus, the information available on the international economy did not justify changing the path of the monetary policy rate (MPR) suggested in the December Report, which already incorporated a large part of the impact of the fuel price decline on prices and output. The domestic economy had performed as expected, i.e. ending 2014 with a low annual growth rate, but higher than those of previous quarters. These were expected to rise as the levels of local confidence picked up, provided that there would be no negative surprises coming from abroad. The impulse from the expansionary monetary policy of recent months seemed adequate and, without a doubt, had contributed to a more gradual adjustment process, helping to keep market interest rates low and smoothing the adjustment of relative prices. The labor market had been unexpectedly dynamic, with the unemployment rate down to 6.1% in November. These good numbers seemed to contradict economic indicators to some extent, but since most of the new jobs were in selfemployment and without a written contract, and real wage growth was declining, 2

3 these were signs that the labor market had been adjusting, albeit slowly. Despite the above, nominal wage growth had accelerated, reflecting the impact of high past inflation figures, a phenomenon that could add increased inertia to those inflation components that were more closely linked to the value of labor. The sharper drop in fuel prices had taken annual CPI inflation slightly below projections, to 4.6% in December. It had also contributed to adjusting downward the inflation outlook at the end of Core inflation, meanwhile, typically more linked to the evolution of medium-term inflation, had been somewhat more dynamic than expected, partly because of the effects of the sharper depreciation of the peso and partly because of this variable s inherent inertia. Projections were that CPIEFE inflation would remain above 4% until the end of the first quarter and would later stand somewhat below 4% for several months. The oil price evolution had helped to revise down inflation by more than one percentage point in a few months. This correction, which would still leave inflation at a high level, certainly mitigated the risk of greater second-round effects or a possible upward turn in medium-term expectations that had been discussed in previous months. However, absent any major risks to the convergence of inflation in the medium term, it was not clear that monetary policy should respond to changes in inflation associated with supply-side shocks, as was the case here. However, recognizing that the current situation crisscrossed by the opposing effects on inflation of low activity and exchange rate movements; by a significant level of uncertainty regarding the output gaps; by the possibility of abrupt changes in international financial conditions; and by surprises in the evolution of international prices of fuels and other commodities made the projection of inflation and other macroeconomic variables particularly complex, while nothing suggested the need to make any changes in the MPR trajectory in the short term. Therefore, the Research Division proposed as the only relevant option to keep the MPR at 3%. 2. Monetary policy decision All the Board members agreed that the main macroeconomic developments originated abroad, particularly the continuing decline in the price of commodities, mainly oil and copper. One Board member noted that last month s positive and negative news seemed to configure a riskier external scenario. About the prices of commodities, one Board member indicated that since this was a widespread phenomenon affecting manufactured goods and fuels, one could certainly attribute substantial part to a demand that was rising less than expected and therefore important not to underestimate the potential depth and extent of this decline. He added that, as this coincided with the dollar remaining strong globally for a period that could easily last more than a year, this cycle of low prices would probably persist at least throughout the whole of In the case of copper, it was clear that the fiscal institutions in place would help to cushion, though not eliminate, its negative effect, especially if it lasted longer and began reflecting in trend price forecasts, as had happened during the upward cycle. In his view, increased risk aversion around the world and capital flowing out of emerging countries could restrict their capacity to implement countercyclical policies if said prices remained low for too long. One Board member said that there was good reason to continue to work with a scenario where supply-side phenomena were the main determinants of the drop in the oil price, but its propagation to other commodities allowed questioning such hypothesis. On one hand, with the available information on world output and demand, it seemed implausible that the drop in commodity prices particularly copper could be due to a weaker world economy. On the other hand, information was insufficient about the financial factors that could be affecting the price of the metal. In his opinion, for the time being, the reasonable thing to do was to follow closely the evolution of the copper price, considering that a further decline could have important effects on the exchange rate and the fiscal side, and that a further deterioration of the copper market, especially with weak medium-term prospects, could have an even greater effect on falling mining investment, which nonetheless was still high in terms of GDP points. One Board member noted that it was difficult to predict whether the commodity price adjustments would settle or reverse, totally or partially. It was also hard to define or gauge at this point all their possible real and financial effects on the world economy, but they did signal the presence of higher risks than had been considered so far. From this perspective, one had to understand the ongoing concern generated by several emerging economies with weak fundamentals and high dependence on oil and other commodities, including Russia and some Latin American countries. Also Greece, although for different reasons, had become again a cause for concern and attention. As a result, risk aversion had increased in financial markets and, as usual in these circumstances, the dollar had strengthened. Still, the growth forecast for 2015 had not been modified significantly. 3

4 On the domestic front, all the Board members agreed that output and demand indicators of the last month were in line with the December Report s baseline scenario, which reflected some stabilization in recent months. One Board member noted that, for now, figures for output, foreign trade and employment significantly reduced the probability of occurrence of the risk of reduced domestic demand that had been mentioned in the Report. In any case, he said, to assess the timing and speed of the recovery it was necessary to analyze how expectations would behave in the coming months and how the lower copper price would affect them. One Board member stressed that consumer and business expectations were still quite low, although in the last month consumer expectations had shown a slight rebound that could be related to the fuel price adjustments. Turning to inflation, one Board member noted that the low figure of December should not be taken as a won battle. In his view, the evolution of nominal wages, the CPIEFE and the recent depreciation of the peso called for close monitoring of this variable. One Board member said that the evolution of core inflation confirmed the impact the peso depreciation had had on inflation, and it also suggested that the discussion on the level of output gaps and the difficulties in measuring them was still valid. He added that, essentially, the forecast that inflation would achieve 3% during the second half of 2015 was still valid too, and that, considering the information at hand, the thought that inflation could post a sharp drop derived from some market prices did not seem to have much merit. One Board member opined that, though striking, the last monthly figure responded to very specific factors. Lately, he said, monthly inflation rates had been quite volatile and would probably continue to be so for some months. Still, the medium-term outlook had not changed, as estimates continued to foresee annual inflation converging to the target in the coming quarters. However, he thought that this could take longer than anticipated, despite the sharp correction in the price of fuels. One Board member emphasized that inflation had ended 2014 above 4%, which could not leave the Central Bank satisfied. Still, it was also more than a full percentage point less than the October figure, and everything seemed to suggest that inflation was converging to the tolerance range, as projected. However, he added, some unfavorable indicators raised some red flags. Nominal wages continued to rise strongly, in line with low unemployment and past inflation. Actual and projected core inflation had been revised upward, which if not quickly reversed could be signaling higher inflation persistence going forward. The decline in actual inflation was a good news because it mitigated the risk of increased propagation to future inflation and wages, but so far the lower figures of the last two months obeyed primarily to the drop in fuel prices. Moreover, the peso depreciation, the main development behind the increase in inflation in 2014, had intensified in recent weeks. He added that the sharp drop in the oil price was very good news inflation-wise but, in general, facing supply-side shocks the optimal monetary policy reaction was less intense than when the shock came from the demand side. He recalled that in fact that was the principle that had been applied throughout 2014 when, despite the supply shocks that had pushed inflation up, the MPR had been lowered significantly. Regarding the monetary policy decision, all five Board members agreed that the only plausible option was to keep the MPR at 3%. One Board member noted that the background information provided internally was consistent with the baseline scenario in the last Monetary Policy Report, in terms of prospects for higher growth and lower inflation in 2015 compared to However, he noted that the main news came from abroad and the direction they could take was unclear. However, in his opinion, the downward effect on inflationary pressures would dominate. As for the oil price, if the fall was due to a supply shock, it would mitigate total inflationary pressures, ease inflation dynamics, reduce costs and also mitigate core inflationary pressures. He did not think that the positive effect on disposable income would be large enough to offset the disinflationary impact already mentioned. On the other hand, if the factors underlying the lower commodity prices reflected a slowdown in global activity, this implied lower growth and a deteriorated outlook for emerging economies, which would also have disinflationary implications into the medium term. One Board member noted that the bulk of information analyzed, plus the fact that the MPR was clearly expansionary, the headline inflation records, the signs of relative strength in the labor market and the risks derived from the observed exchange rate volatility, particularly in the short term, totally justified holding the MPR at 3%. One Board member said that it was difficult to propose any other option than holding the MPR at 3%. The scenario depicted in the Report remained valid and making adjustments or corrections was not prudent so shortly after its publication. Thus, he thought best to give signs of stability in monetary policy, at least for some time. He also said that some events had to be thoroughly assessed before introducing changes in the diagnosis and policy strategy. Still, none of them was alien to the scenario described in the Report. One Board member stressed that monetary policy had acted with determination and was clearly expansionary. The long-term rates had continued to decline and 4

5 were at or near record lows. Furthermore, their effects were being reflected in the market interest rates, particularly on mortgages, but also in those of other loans. In this scenario, the only plausible option was to keep the MPR at 3%. Raising it would be out of line with the cyclical state of the economy and with inflation, which was expected to continue falling. Lowering it implied taking a position that, in his view, would be inconsistent with the above risks of more persistent inflation. It should be noted that some of these risks have been materializing. 3. Agreed policy action The Board decided, with the votes of Governor Vergara, Vice-Governor Marshall, and Board members Claro, Vial and García, to keep the monetary policy interest rate at 3%. 5