Monetary Policy Meeting 1 / MAY 2015

Transcription

1 1 / MAY / 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. 222, held on 14 May Present: Rodrigo Vergara, Governor; Enrique Marshall, Vice-Governor; Sebastián Claro, Board member; Joaquín Vial, Board member; Pablo García, Board Member. Present the Finance Minister, Rodrigo Valdés. Also present: Alejandro Zurbuchen, General Manager; Juan Pablo Araya, General Counsel and Attestor; Alberto Naudon, Research Division Director; Beltrán de Ramón, Financial Operations Division Director; Claudio Raddatz, Financial Policies Division Director; Miguel Fuentes, Macroeconomic Analysis Manager; Enrique Orellana, Strategy and Communication of Monetary Policy Manager; Diego Saravia, Economic Research Manager; Matías Bernier, Domestic Markets Manager; Rodrigo Alfaro, Financial Stability Manager; Gloria Peña, Macroeconomic Statistics Manager; Diego Gianelli, Head of the International Analysis Department; Claudio Soto, Advisor to the Finance Minister; Tatiana Vargas, Senior Economist; Natalia Gallardo, Senior Economist; Jaime Troncoso, Journalist; 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 /. Incoming data since the April meeting and the analysis performed to be included in June s Monetary Policy Report depicted a domestic and global macroeconomic scenario that, in broad terms, was very similar to the one forecast in the March Report. Locally, the main elements from the March Report were the following: In the 2 / first place, inflation was expected to hover around 4% untill the third quarter of Its increase of the last year and a half related primarily to the depreciation of the peso, and its high persistence had to do with both the widespread indexation of the economy and the unyielding persistence of the exchange rate shock. Secondly, the real exchange rate had, with ups and downs, made the largest part of the adjustment and, accordingly, under baseline scenario conditions, should not be a significant source of inflation going forward. Thirdly, output was expected to recover gradually during the second half of the year, because the economy had already adjusted substantially; there was a growing impulse coming from abroad, and the level of agents confidence was expected to improve. Finally, the labor market was assumed to not represent by itself an additional source of inflation, while the evolution of nominal salaries was believed to be due mainly to the usual levels of indexation. In this context, the monetary policy option preferred by the Research Division was also consistent with the March Report. On that occasion, it had been estimated that, given the cyclical conditions of the economy, in order to ensure the convergence of inflation in the usual horizon, it was necessary to hold on to the expansionary monetary policy as it was, at least until the end of the third quarter of this year, and later discuss the normalization process. With regard to other options for monetary policy, the Research Division did not consider the option of a further monetary boost relevant. This, because inflation had been above the tolerance range for nearly a year and it was still projected to remain at similar values for some months, in a context where monetary policy was highly expansionary and where conditions for the economy to start growing more strongly towards the end of the year were still in place. One argument in favor of raising the MPR as a policy option could be that a high inflation rate for several months would always pose a risk to the anchoring of expectations. This, in a context where, first, monthly inflation had been unexpectedly high in three of the past four months; second, there were legitimate doubts about the true size of the output gap and the causes behind nominal wages high growth. Nevertheless, the Research Division was of the opinion that this time around there were four reasons not to take this option into account. First, although inflation had exceeded market expectations, inflation s dynamic had been consistent with the Bank s estimates, especially for the CPIEFE. Second, although the baseline scenario for this meeting was very similar to that in the March Report, new developments revealed somewhat milder inflationary pressures: output indicators suggested a slower recovery for the remainder of the year and 2

3 the recent exchange rate appreciation would contribute to a somewhat faster convergence than previously thought. This combined with the assumption that, in the current conditions, the risk of a de-anchoring seemed to be very low. Second, although both headline and year-end expected inflation were high, medium-term expectations had remained stable. Third, the MPR path expected by the market was essentially very similar to the one considered most likely in the baseline scenario. This, in a context where market expectations for inflation and output were also similar to those of the Bank. Finally, the option of raising the policy rate became less relevant in a scenario that could not rule out that the recent increase in long rates seen in many economies, and which seemed to be related to a decompression of term premiums, could push domestic long rates up above the Bank s estimates. Therefore, the Research Division proposed as the only relevant option to keep the MPR at 3%, with a neutral bias. 2. Monetary policy decision About the world economy, all the Board members agreed that the scenario was not too different from what had been foreseen. One Board member noted that two trends could be envisioned that, together, meant a more balanced growth process around the world. On the one hand, in the developed world growth projections had risen, while they had fallen for emerging economies, narrowing the gap between them. Moreover, within the developed economies, projections were down for the United States and up for the Eurozone, narrowing this gap too. One Board member noted that the differences were rather subtle and possibly influenced by specific events, especially in the United States. What was most important for Chile, he added, were the price increases for oil and copper which, while bounded, had been larger than forecast. Also worth mentioning were the recent increases in long-term interest rates in all developed markets. One Board member said that, in his opinion, what was most disturbing were the very poor figures for Latin America, whose growth prospects had been further revised downwards. He added that the recent developments in global financial markets pointed generally in the direction of a normalization of the global macro-financial scenario. However, he concluded, beyond the moderation that could be inferred from the latest indicators, risks that could not be circumvented persisted. One Board member noted that the sharp drop in commodity prices during the first quarter had been partly reversed, in line with the dollar s depreciating trend. In his view, both events were quite important. On the one hand, it was possible that the upward trend in commodity prices was a reflection of the difficulties surrounding Chinese growth being perceived as bounded a vision that, broadly speaking, he was in favor of and that the US recovery and incipient improved data in Europe set a limit to the falling prices of commodities. This, he added, was fairly different from the scene expected two or three months back, with a sharper drop in these prices in general. He also stressed its direct effect on inflation, in particular the upward impact that could come from the higher oil price. On the other hand, he added, there was the depreciation of the dollar, a phenomenon of many edges. In his view, the Federal Reserve and the financial markets at large envisioned that too strong a dollar could hamper the recovery in the United States, and that the strong monetary expansion in Europe, which he believed would continue for some time, would partly obstruct the process of monetary normalization in the United States. This could delay the normalization of US rates for longer than foreseen and, therefore, the strength that had been anticipated for the dollar would be smaller. This, incidentally, had macroeconomic and financial stability implications in the United States, but the important thing for now was its possible impact on commodity prices an open issue not easily assessed and on asset prices in general, mainly on the path of long-term rates and currencies. About the domestic economy, all five Board members agreed that first-quarter figures confirmed a moderate rebound in growth, although the most recent data showed a loss of momentum. At the same time, they noted that inflation was on a trend similar to that foreseen in the March Monetary Policy Report. In the opinion of one Board member, the fact that output and employment figures were marginally better than projected even though expectations indicators showed no improvements reduced the likelihood of adverse risk scenarios. One Board member noted that, after hitting its lowest point in the third quarter of last year, economic growth had posted a moderate and gradual increase. In his view, the country had made the necessary adjustments in both relative prices and the current account, while having an external scenario that was not perceived as negative. This illustrated the importance of rebuilding expectations to speed up output and spending. One Board member noted that the most recent data pointed to slower growth, suggesting that in the second quarter there could be no further acceleration in output or spending. In his view, it was necessary to carefully examine this issue because of its effects on growth expected for the full year. In his opinion, the importance of improving expectations of households and firms had been stressed in order to secure a scenario of higher growth and, while it was not possible to determine exactly what and how these expectations were determined, it was necessary to assess how the tone of the public debate, including ministry adjustments, could be modifying them. 3

4 One Board member noted that April s CPI inflation had been higher than expected by the market, which was bad news. Core inflation the CPIEFE, however, had been in line with estimates, as had been repeated for several months. In practice, this meant that the surprises of recent months had been in the most volatile and difficult to predict part of the CPI. However, both the CPI and the CPIEFE were still above 4% annually. Inflation expectations two years ahead, meanwhile, remained anchored at 3%. He added that annual wage growth remained high, which was a source of concern from the inflation standpoint. The fact that its increase was mainly explained by wage indexation was no guarantee that within a reasonable time span it would return to levels more compatible with the inflation target, all the less so in an environment where the labor market gaps were low. One Board member said he had doubts about the relationship between wage dynamics and the degree of indexation. He added that, in the present context, the implicit degrees of indexation could be critical, first to determine the velocity of inflation s convergence to the target; and, second, to evaluate the true size of the gaps in the economy. Several Board members drew attention to the nominal and real appreciation that the peso had shown since the previous meeting. They agreed that, given the importance of the depreciation in explaining the higher inflation, it was crucial to understand the causes of the current phenomenon and whether it would persist, as this could lead to a more rapid reversal of inflation towards 3%. Some Board members indicated that the fluctuations of the peso coincided with changes of financial nature that pointed in opposite directions. The steepening of the yield curve in the developed world and the larger relative increase in oil prices over copper, would suggest that the pressures led to depreciate rather than to appreciate the peso. Meanwhile, the better prospects for the Eurozone and a slowdown in US growth which pushed back the start of the increase in the policy rate could have reduced exchange rate premiums associated with the risk of an abrupt adjustment in international financial conditions, tending to appreciate the emerging currencies. Moreover, they added, a lower real exchange rate suggested that macro conditions were appropriate for a rebound in domestic demand, precisely because the adjustment of the current account had been quite intense. Turning to the monetary policy decision, all the Board members agreed that the only possible option was to keep the MPR at 3%. One Board member said that the economy was still on a path of moderate growth and inflation was still moving, in general terms, in the scenario estimated in the March Monetary Policy Report. In his view, this allowed to maintain a similar diagnosis to that in the Report and therefore the only relevant option on this occasion was to keep the MPR at 3%. He added that the effect of changes in the domestic and external scenario mainly the slowdown in economic activity, the failure of expectations to recover and the nominal and real appreciation of the peso on the inflation outlook, and therefore, on monetary policy, were less than obvious. However, overall, the market had tended to consider that the process of MPR normalization would be taking place rather by 2016, which was not so different from the Bank s estimates. Therefore, he thought it untimely to consider any option other than to keep the MPR unchanged, especially if there were no signs of the inflationary trend being on a different path than the one forecast. One Board member mentioned that after a period of extraordinary expansion of domestic demand, driven by the mining boom and its multipliers on sectors such as energy and real estate, the economy had adjusted pretty quickly and efficiently, which reflected in a real depreciation of the currency and a moderate and temporary increase in inflation. The economy had slowed, which was expected and desirable given the high current account deficit of the previous period, but it had not fallen into a recession and unemployment rates were still relatively low. In this picture, conditions would be ripe for growth to resume in line with potential as soon as expectations began improving. In his view, all in all, this view was correct. However, he had some doubts as to whether the Chilean economy could grow at rates between 4% and 4.5% in a year, without generating external imbalances or inflationary pressures at longer horizons. These questions were related to the difficulty of measuring the size of the output gap in an adequate and timely manner, and the possible excess capacity. Doubts fed, among other things, on the somewhat greater than foreseen passthrough of the currency depreciation, on wages that continued to grow strongly and on the evolution of the real exchange rate. All this pointed to the need to carefully review the Bank s vision about output gaps, actual and expected, in order to properly evaluate the timing and trajectory of the normalization of the monetary stimulus. One Board member pointed out that the core monetary policy message outlined for some months already was still totally valid, and that on this occasion there was no option other than favoring the decision to keep the MPR flat. One Board member said that the option that clearly emerged again was to maintain the MPR. He added that, actualy, it was quite difficult to provide support to any different policy option. Therefore, the advisable thing to do in these circumstances was to reaffirm the idea of stability over a short-term horizon. One Board member expressed that the Central Bank had contributed to the recovery by its expansionary monetary policy, in an environment of exchange rate depreciation and rising inflation. This, under the belief that the price 4

5 increases were transitory, and would continue to reverse going forward. However, the persistence of inflation above the target range left no room for further monetary stimulus. As had been assumed in the baseline scenario of the March Report, by the end of this year or early next year the convenience of a monetary normalization should begin to be examined. Of course, if both actual and projected inflation were more persistent than projected, this process could be anticipated, and the opposite would happen if such persistence turned out to be lower. He added that the option of lowering the MPR could quickly be ruled out as inadmissible. The option to raise it, while it had more merit based on inflation indicators, was inconsistent with the current stage of the economic cycle or with the projection that inflation would gradually decline towards the target. Therefore, the only possible option was to hold the MPR at 3%. 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