Monetary Policy Meeting 1 / FEBRUARY 2016

Transcription

1 1 / FEBRUARY / 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 No. 231, held on 11 February Present: Rodrigo Vergara, Governor; Sebastián Claro, Vice-Governor; Joaquín Vial, Board member; Pablo García, Board member; Mario Marcel, Board member. Present the Finance Minister, Rodrigo Valdés. Also present: Juan Pablo Araya, acting General Manager, General Counsel and Attestor; Alberto Naudon, Research Division Director; Beltrán de Ramón, Financial Operations Division Director; Claudio Raddatz, Financial Policy Division Director; Francisco Ruiz, acting Statistics Division Director; Miguel Fuentes, Macroeconomic Analysis Manager; Elías Albagli, Modeling and Economic Analysis Manager; Luis Álvarez, Communications Manager; Diego Gianelli, Head of the International Analysis Department; Tatiana Vargas, Senior Economist; Natalia Gallardo, Senior Economist; 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 / The most significant news came from abroad. Financial markets had continued to show substantial volatility, within a context where increased risks could be perceived for the global economic outlook. With a few exceptions, the riskier assets had lost value, commodity prices remained low, various volatility indicators had risen to four-year highs, and developed countries long-term rates had dropped. The difficulties of the Chinese economy and doubts about how policy makers would deal with them were still of great concern in the markets. In addition, and partly because of this, the notion that the world economy would be unable to sustain its current rate of expansion, with the resulting downward revision to global growth projections, gained strength, despite recent data from major economies showing no big deviation from forecast trends. 2 / Thus, although there could be some overreaction in market movements, it was clear that the external economic outlook had deteriorated, especially for the most commodity-dependent emerging countries, and/or those that still required further economic adjustments, as was the case for several countries in the region. There was every sign that commodity prices would remain low for still some time, while external financing conditions would remain tight. Therefore, it was likely that several of the elements behind the increased uncertainty would not dissipate anytime soon. The worsened prospects for activity and the reduced oil prices had rekindled fears of low inflation in developed economies. Central banks had reacted with an easing of their monetary policies, announcing future actions along those lines, or marginally relativizing the velocity of monetary policy normalization. Although this would provide support to their economies, unlike other cycles of monetary easing in developed countries, it was likely that this time around there would be no material impact on financial conditions in emerging countries, as now the problems had originated mainly in the latter. Chile had not been immune to these tendencies, although the effect on the risk premiums and the exchange rate had so far been somewhat more bounded than elsewhere in the region, and more aligned with developments in other commodity exporters such as Australia, Canada and New Zealand. However, the latest Economic Expectations Survey showed that a significant portion of the market had revised their growth projections for 2016 and 2017 downward. Both the materialization of this scenario of weaker global activity and the persistence of more adverse external financial conditions would significantly affect the evolution of local economic variables and, therefore, could alter the course of monetary policy. The reassessment of the external scenario and its impact on the domestic economy would have to be assessed during the preparation of the Monetary Policy Report of March. Domestically, the data had been in line with the short-term scenario outlined in the December Report. Fourth-quarter figures reflected somewhat lower than expected growth, but with some surprises mainly in agriculture and mining. At the close of 2015 the labor market was behaving in line with expectations, but with greater signs of weakness in the margin. Early January data were consistent with the economy growing at a modest pace, but there were no signs of a slowdown beyond forecasts. Inflation tended to confirm that during the earlier part of the year it would remain high and the market had been adjusting its perspectives to a similar 2

3 vision. In January, inflation had been above the market s expectation. Thus, the tension between high inflation in the short term and downward pressures in the medium term associated with the low rate of growth continued to pose the biggest challenge. The issue was how to provide the right monetary stimulus to an economy that was growing below potential, but safeguarding the convergence of inflation. Failing here in the convergence of inflation would call for more aggressive policy action going forward, which would undoubtedly affect the dynamism of the economy. In this context, the Research Division presented as the relevant options for the meeting: (i) to raise the MPR by 25 basis points to 3.75% or (ii) to hold it at 3.5%. Like in the previous month, the option of raising the MPR was justified in that, in an environment of persistently high inflation, where the labor market, despite some adjustments, continued to show a significant degree of resilience and where the monetary policy stance was clearly expansionary, the convergence of inflation might take longer than expected. A rise in the MPR now would reduce the likelihood of sharper movements in the future. However, a faster withdrawal of the monetary stimulus had its risks. Particularly relevant were the possible negative effects on the dynamism of the economy in a scenario of deteriorating external conditions. That expected inflation two years ahead remained well anchored at 3%, despite high headline numbers and volatile expectations one year ahead, attenuated the risk of inflation exceeding the medium-term forecast, especially if the downside risks for activity came true. Meanwhile, the option of holding the MPR was consistent with the Report s scenario, which, at least in its short-term projections, had been materializing. In addition, anticipating cuts to the monetary stimulus was unattractive in a context where the downside risks in activity identified in the December Report had intensified, and where doing so would take the market by surprise. Also, as had been highlighted in the previous month, in a context of greater uncertainty, gathering information on the short- and medium-term effects of the various events discussed was highly valuable, because their consequences on the evolution of inflation were far from obvious. Finally, the drop in the global oil prices would help inflation to converge to the target as expected. In this context, according to the Research Division, the option of holding the rate clearly dominated. 2. Monetary policy decision All the Board members noted the news coming from abroad, especially the drop in asset prices and global growth expectations, the increase in risk aversion and the volatility of financial markets. Some Board members stressed that these conditions occurred in a context where the authorities of several developed economies had given clear signs of more expansionary monetary policies. One Board member said that the uncertainty about how China would resolve some of the quandaries relating to its economic rebalancing process and the weakness of other emerging economies coupled with growing concern about the sustainability of growth in the United States, the velocity of inflation s recovery in Europe and Japan, and the impact of the oil price drop on the industry s firms and their financial creditors. Behind these elements was a recovery characterized by dissimilar velocities in the growth of large economic blocs, as well as differences between services and manufacturing, which had receded in recent months in some of the main industrialized economies. One Board member said that there were also evident tensions in China between monetary and forex policy actions, casting doubts on the success in meeting the challenges posed by the country s economic transition. In Europe, one concern was the weakness of some financial institutions lingering since 2009 which became more evident facing the downward adjustment of growth expectations, risks of deflation and a possible deterioration of loan portfolios, especially those linked to companies and governments dependent on commodity prices. Latin America, he said, seemed to be in a difficult position, especially as several of the countries in the region needed to make adjustments to cover their financing needs, either fiscal or of foreign currency. Some Board members noted the complexity of deciphering a unique phenomenon behind the significant revisions of the external environment. One Board member opined that maybe this was not so much a specific phenomenon affecting one market in particular with consequences spreading to other markets, but possibly a revaluation of the external economy as a whole, as it was still very difficult to project what would be the sustained source of global growth. He added that there was no doubt about the importance of closely monitoring these developments in order to infer their implications on growth, inflation and monetary policy in Chile. One Board member said that, so far, global output and employment data did not reflect the increased uncertainty of financial markets, as did output projections. In his view, the risk was for this to be a predictor of worsened figures spreading to the real economy. Overall, one could not rule out a calming of the markets and a return to a situation of less volatility. The coming weeks would be important in this regard, although at this point there was no doubt about the deterioration of the external scenario affecting Chile. 3

4 In the opinion of several Board members, the case of Chile was striking because the depreciation had been more moderate and long-term interest rates had remained low. According to one Board member, this possibly reflected a better fiscal position and less dependence on external savings. One Board member expressed that, compared with the Monetary Policy Report, the world growth outlook had deteriorated, the impulse from abroad for the emerging world was milder, and financial conditions had tightened and would continue to do so for quite a while. On the domestic front, according to several Board members, the general guidelines of the Report s baseline scenario remained valid. Some Board members stressed that, while it was still premature to evaluate the effects of the global financial tightening, it was apparent that financial conditions had contracted somewhat, which could be seen, for example, in credit supply costs and standards. One Board member said that although growth had fallen slightly short of the Report s forecast, the larger part of the correction was due to mining and agriculture and did not depend on domestic demand. One Board member commented that the more negative scenario for output derived from the external situation and also depressed levels of domestic demand, influenced in part by the continuing pessimism of consumers and businesses and a gradual deterioration of the labor market. After a period of low aggregate unemployment rates there was now increasing unemployment among men aged years which had not reflected in higher aggregate unemployment because of significant changes in the composition of the labor force relating to the dynamics of other population groups. An increase in part-time employment and a slowdown in wages of salaried workers could also be seen. All this was indicative of a labor market that had been adjusting through variables other than open unemployment. This did not mean that the adjustment in terms of mass income and consumption capacity was not significant and that it could not increase in the near future. Some Board members pointed out that the worsening of the world economy resulted in the growth forecast for 2016 falling in the lower part of the range foreseen in the December Report. One Board member thought it important to note that the mining industry would take a toll on growth in the coming months, while sectors unrelated to natural resources would continue to grow at a stable pace. One Board member noted the substantial correction of the market s growth expectations for 2016 and 2017, an issue that would be key in the March Report, because it would feature the first projections for About inflation, all five Board members noted that it had behaved as foreseen in the December Report. One Board member asserted that incoming numbers had been affected by adjustments to managed prices, which had deviated the attention away from two elements that were indicative of underlying trends. First, CPIEFE inflation for services, excluding financial services, remained below its peak of last September; and second, CPIEFE inflation for goods, excluding cigarettes and alcoholic beverages, had been close to zero in the month, which, in his view, involved a significant reduction in the exchange rate s impact on inflation. Plus the effect on local prices of the drop in international fuel prices. One Board member noted that both the cost-push pressures coming from the peso depreciation and the trajectories of several labor market indicators left no room for any significant change in the inflation outlook. If anything, wages had followed a deceleration trend that was somewhat steeper than had been foreseen two or three months back. However, everything seemed to indicate that inflation would remain high for several more months before turning down to gradually descend to 3% well into One Board member, along with indicating that inflation was somewhat higher than expected by the market, said that labor costs continued to decelerate, which at some point should have an impact on nontradable inflation. Meanwhile, the oil price drop would help inflation somewhat. On the other hand, further pressures on the exchange rate with effects on inflation could not be ruled out. One Board member recalled that a group of market analysts expected lower inflation rates for these months, which had not been validated yet. Quite the contrary, the market s projections had tended to align themselves with those in the Report. As for the monetary policy decision, all the Board members agreed that the two options proposed by the Research Division merited discussion, but keeping the same MPR dominated the alternative of raising it. One Board member based its vote to keep the MPR unaltered on the economy s movement towards the negative risk scenario for growth included in the December Report, with its corresponding impact on the output gap; on the new elements of uncertainty in the global economy, which called for a more prudent monetary adjustment; and on maintaining the path of gradual convergence of inflation to the target. He also thought that the keep option would send a clearer message about what the Board meant by a "meaasured" adjustment of monetary policy and would allow gathering information to fine tune diagnosis for future decisions. One Board member recalled that the December Report s scenario had implicit a gradual normalization of the monetary stimulus in place, only further in the year, together with risk scenarios that could advise holding the MPR flat for longer. In 4

5 this context, keeping the policy rate where it was dominated. About the bias, he was for using the same language of the previous month, awaiting a more global reassessment of the medium-term inflationary pressures, an issue that would be dealt with in the March Report. One Board member said that the Report s messages regarding the trajectory of monetary policy remained valid and the options put forward by the Research Division were consistent with them. He agreed that the best advice was to hold the MPR at 3.5%. Looking beyond this meeting, he said it seemed particularly important to carefully follow the international economic developments and their potential impacts in Chile, because that was where the greatest risks were observed, which should be a main focus of the next Monetary Policy Report. One Board member drew attention to the trade-off facing monetary policy. On the one hand, a milder external impulse that should have an impact on output, demand and inflation in the medium term, but on the other, pressures coming from financial conditions with interest rates and an exchange rate that could influence the inflation trajectory in the short term, especially in a context where it was expected to remain high over the first half of the year. Thus, in line with the points made by the Research Division, he said that the dilemma for monetary policy was how to provide the right monetary stimulus to an economy growing below potential, but at the same time, safeguard and ensure the convergence of inflation to 3% in the medium term. In his opinion, the monetary policy trajectory of the past six months had been the right one in such a context, as had been the communication of the bias with a potential gradual and measured adjustment. This had been well received by the market in terms of assuring that monetary policy continued to be expansionary, but clearly confirmed the Bank s commitment with the 3% target. Thus, he said he was for holding the MPR at 3.5%, leaving room for possible adjustments going forward, if conditions so recommended. One Board member thought that the raise option was consistent with inflation remaining above the target and that, while foreseen, had even accelerated. It was also consistent with the stronger than expected persistence, with gaps that, while expanding, were modest and entailed foreign exchange risks. Although obviously with the current levels of growth inflationary pressures should ease in the medium term, inflation s elasticity to the gap was low (at least in the short term) and inflation persisted above the upper limit of the tolerance range could feed back future inflation and expectations. The risk of this option was that in a scenario of significant risks, reducing the monetary stimulus could prove premature and stronger than needed to ensure inflation s convergence to the target in the projection horizon. In his opinion, the option of keeping the MPR unaltered was consistent with the Report and with minor corrections to the internal inflation forecasts. Inflation expectations remained well anchored and the downside risks for growth were in the direction of reinforcing the anchor. Labor costs, while still growing above their historic mean, were slowing. He went on to point out that the Central Bank had kept an expansionary monetary policy stance for a long time, which was natural in this context, despite the fact that inflation had completed almost two years within or above the target range. Below potential growth and inflation expectations anchored to the target so advised. This expansionary monetary policy had been critical to contain the slowdown in activity and provide resilience to the labor market. The low interest rates were clear proof of the expansionary stance. Nonetheless, as had been said before, for inflation to converge to the target, it had been necessary to walk a path of gradual, moderate reduction of the monetary impulse. The market had understood that monetary policy would remain expansionary, but that the Central Bank of Chile, meanwhile was fully committed with its price-level stability mandate. 3. Agreed policy action The Board decided, with the votes of Governor Vergara, Vice-Governor Claro, and Board members Vial, García and Marcel, to keep the monetary policy interest rate at 3.5%. 5