POLICY IN A LOOK BEHIND AND BEYOND(∗)
MONETARY CHILE:
Rosanna Costa
Governor, Central Bank of Chile
10 September 2024
Good afternoon, it is a pleasure to be with you today, in this new version of Chile Day.
The Central Bank of Chile has the mandate to keep inflation low and stable. To achieve
its objectives, for more than 20 years the Bank has been conducting its monetary policy
under the medium-term inflation targeting scheme with a flexible exchange rate.
During this time, we have seen how the Bank has successfully overcome important
challenges, generating confidence and credibility in its policies, as well as high
institutional strength and value.
A LOOK BEHIND OUR MONETARY POLICY IN A CHALLENGING CONTEXT
The last few years have been particularly challenging for our country and for the Central
Bank's policy framework. But they have also given us the chance to demonstrate its
validity and strength not only to the public more involved in economic and financial
issues, but also to the Chilean society at large. Our institution played a relevant role in
reining in the effects on the financial markets after the social outbreak, in generating
support measures to mitigate the effects of the pandemic and then in controlling the
inflationary shock we experienced as a result of the excessive increase in domestic
spending and a series of external factors. Today, we can say that monetary policy has
done its job, stabilizing the economy and bringing inflation around its target. As a result,
we are facing a different cycle. I will refer to all this in more detail later on.
To put these statements in context, I would like to begin this presentation by describing
the developments of our economy in recent years. Thus, it is worthwhile to dwell on the
different types of shocks that have hit us, bearing in mind that their nature was unusual,
that they required ad-hoc monetary policy responses and that the policy framework
was flexible enough for an adequate conduct of monetary policy.
Let us start by recalling the weeks immediately following the social outburst of October
2019. This event had effects on several dimensions, including a significant drop in
economic activity in the last quarter of that year, which also affected employment. The
most lasting effect was undoubtedly the increase in uncertainty. We saw during the
discussions on a new constitution how the local financial market became stressed,
which was exacerbated by the impact of the pension savings withdrawals. At the end
of 2019, the Bank accommodated its monetary policy, by reducing the monetary policy
rate (MPR) to allow for further stimulus. But most important were probably the
measures to promote the proper functioning of markets, including the November 2019
intervention in the foreign exchange market (Figure 1).
We were addressing idiosyncratic challenges when the Covid-19 pandemic emerged.
The rapid spread of the disease in the world and the doubts about its scope in many
dimensions placed a significant blanket of uncertainty on the world economy. The
abrupt closures of various activities and the destruction of jobs posed a significant
challenge for the world's economic authorities. As the debate began among specialists
about the duration of the crisis and its potential scars on the economy, the central
banks reacted promptly with a substantially expansionary monetary policy. In our case,
that reaction was early. By mid-March 2020, we were already reducing the monetary
policy rate to its technical minimum and implementing a significant package of
measures to ensure the proper functioning of markets and to avoid an amplification of
the crisis through a contraction of credit. Today, all these measures are no longer
active. The evaluation of their effects, together with other measures adopted by the
government, indicates that a drop-in activity that could have been more than 7
percentage points higher was prevented1.
As a society adapted to operating in a pandemic, the economy began to open up and
the measures adopted bore fruit, activity began to show greater resilience than
expected. In the second half of 2020, GDP levels were already beginning to recover.
Was in this context that a series of household income support measures began to be
added. Thus, as supply restrictions were lifted, a large-scale demand shock was
generated. During the first half of 2021, demand began to grow strongly, and significant
macroeconomic imbalances were created, pushing inflation upwards.
During this period, both external forces and the high levels of domestic uncertainty,
depreciated our currency, putting additional pressure on prices. In addition, at the end
of 2021 and beginning of 2022, global factors had an even stronger impact on inflation.
Global supply bottlenecks, the effect of the Russian invasion of Ukraine on energy and
commodity prices, and the tightening of sanitary restrictions in China hit our country in
this environment of already high inflation.
Monetary policy responded strongly to this scenario. The forces behind the sustained
and generalized increase in prices came mostly from domestic demand. Furthermore,
the formation of inflation expectations was being affected. In a few quarters, the MPR
went from a low of 0.5% to a peak of 11.25%, the highest in nominal terms in the last
25 years. The monetary policy reaction was significant and swift, consistent with the
size of the inflationary shock being faced and the risks it posed to inflationary
convergence. In a context of high uncertainty, the Central Bank of Chile was one of the
first central banks to react globally. Fiscal policy also did its part in 2022, reducing the
substantial increase in fiscal spending of the previous year.
It is important to note that this period was particularly difficult for a society that had
forgotten what it was like to deal with high and volatile inflations. Public opinion made
rising prices one of its main concerns. Explaining its origin, the actions taken by the
Bank and what we expected to happen required a significant effort on the part of the
institution in terms of communication, which was much more accustomed to dealing
with specialized audiences. This entire process left us with important lessons and the
constant challenge of explaining to every citizen our work and how it impacts their daily
lives. Undoubtedly, this is a challenge that all central banks share and in which we
strive to advance every day.
Recent quarters have shown the consistency of the Bank's monetary policy work. In
mid-2023, when we were convinced that inflation had consolidated the process of
convergence to the target, we began to lower the MPR. Our first reduction of 100 basis
points was made in July last year, being again one of the first banks to move in that
direction. Among the elements we considered in that evaluation were the steady
decline in inflationary records, progress in the economy's adjustment, and two-year
inflation expectations once again anchored to the 3% target. The latter is something
that has yet to be seen in some countries.
Since July 2023 to date, we have reduced the MPR in 575 basis points (bp), considering
the cut at our last meeting, a week ago. Thus, today the rate stands at 5.5%.
At this point, having taken a look behind what we have faced in recent periods, our
monetary policy report (IPoM) for the third quarter, published last Wednesday, shows
us that there are still challenges ahead. I will address the main aspects analyzed in this
IPoM, but I will say now that there is something different from what we have seen for
most of the last few years. Today the imbalances have closed, inflation has
approached 3%, and two-year expectations are well anchored to the target. This puts
us in a better position to face shocks with a more traditional monetary policy
framework, where it is possible to absorb the shocks facing the economy within the
policy horizon and with interest rate responses that entail a lower associated cost for
economic activity.
THE MONETARY POLICY REPORT: CHALLENGES OF THE CURRENT SCENARIO
Firstly, the evolution of activity during the year has fluctuated, responding mostly to
one-off and transitory factors. Thus, we saw high dynamism in the first quarter and a
moderation in the second quarter, which was greater than expected. The data for the
beginning of the third quarter continued this trend (Figure 2).
On the demand side, data for the second quarter also showed a slower-than-expected
performance, particularly for private consumption. This behavior occurred in a context
in which, in recent times, several of its fundamentals have evolved in line with
expectations (Figure 3). Beyond the quarter-to-quarter volatility, taking mid-2023 as a
reference point, consumption has begun to recover in line with the recovery of the labor
market and the decline in interest rates.
Gross fixed capital formation (GFCF) stabilized after a sharp drop in the second half of
last year. Preliminary information based on micro data reveals important differences
across sectors. While weakness is observed in the vast majority of them, the dynamism
of investment in mining contrasts (Figure 4).
Regarding inflation, as I mentioned a few minutes ago, it fell rapidly from its peak of
14% in August 2022 to 3.2% in March of this year. Since then, we have seen an increase
in the annual variation of the CPI, due to the impact of higher transportation costs
globally, the depreciation of the peso during the year and, especially more recently, the
rise in electricity rates.
Total annual inflation rose to 4.6% in August, while core inflation reached 3.7%
(according to reference series). The higher inflation of volatile items responds mainly
to the increase in electricity prices. The relevance of this last factor can be seen in the
evolution of core inflation, which has remained at figures of around 3.5% annually. All
this in a context in which market inflation expectations remain anchored in the target
in the policy horizon (two year) and the economy has largely closed it output gaps.
However, one-year projections show a significant increase (Figure 5).
The reduction in the MPR has continued to be passed through to bank lending rates in
line with the usual patterns, with declines in commercial and consumer credit interest
rates, while mortgage rates have declined less in line with long-term rates that remain
high by historical comparison. Lending remains weak. In commercial loans, this result
is coherent with the behavior of sectorial investment, which is dynamic for mining --
which uses Foreign Direct Investment more intensively to finance itself-- and weaker in
the rest of the sectors that are more intensive in the use of bank credit.
On the other hand, in a box included in the last monetary policy report, we analyze the
evolution of non-financial firm credit for Chile and other developed and emerging
countries. Two observations stand out from the analysis of the data. First, in the first
stage of the pandemic period, counter cyclical policies generated a significant
expansion of credit worldwide. Second, the weakness of credit in recent years has
been a global phenomenon and the case of Chile does not look particularly different
from the rest of the world.
The Chilean financial market has followed the movements of global markets, adjusting
to the volatility of the external scenario, dominated by the outlook for the Fed's next
moves (Figure 6).
Thus, the projections for activity and demand continue to consider that the economy
will grow around its trend over the next few years. For 2024, the range of GDP growth
projections is reduced at its high end, to between 2.25% and 2.75%. This forecast is
similar to the projections included in the June and March reports (between 2.25-3.0%
in the first and between 2 and 3% in the second), the latter revision being largely due to
the second quarter results. For 2025 and 2026, growth projections remain in a range
between 1.5% and 2.5% (Table 1).
Private consumption will regain momentum, as the lower cost of credit and the
increase in the real wage bill suggest that its recent moderation will not be persistent.
By 2025 and 2026, private consumption is expected to grow at a pace in the order of 2%
per year. The GFCF growth projection for the 2024-2026 period is somewhat lower than
the one considered in June, as a result of the weakness of investment in the non-mining
sectors. For the mining sector, the central scenario ratifies a positive investment
momentum (Figure 7).
Regarding inflation, we project that the annual variation of the CPI will continue to rise
in the short term, mainly due to sharper increases in volatile components. By the end
of this year, headline inflation is expected to close at 4.5% (4.2% forecast in June). In
the medium term, inflation will decline more rapidly than previously anticipated, given
the lower inflationary pressures stemming from the performance of domestic demand.
We estimate that its convergence to the 3% target will occur in the first months of 2026,
to remain there until the end of the policy horizon (Figure 8).
The impulse that the Chilean economy will receive from abroad considers a growth of
trading partners without major novelties with respect to the previous projection --of the
order of 3% in the period 2024-2026--, somewhat more favorable international
financial conditions and somewhat lower terms of trade. The price of copper is slightly
below the previous estimate. For 2024, US$4.15 per pound is projected (US$4.3 in
June), while for 2025 and 2026 values of around US$4.3 are still considered.
MONETARY POLICY STRATEGY
As we mentioned in our monetary policy meeting, the background described suggests
limited changes in the outlook for activity, although spending shows greater weakness.
This, together with inflation expectations aligned with the 3% target, reduces the risks
of higher inflationary persistence in the medium term as a result of the cost shock.
In this context, we estimate that, if the assumptions of the central scenario of this IPoM
materialize, the reduction of the MPR towards its neutral level will be somewhat faster
than expected in June. This will occur at a pace that will take into account the evolution
of the macroeconomic scenario and its implications for the inflation trajectory.
The MPR corridor is a tool through which we inform a rough path for the rate, it is not a
commitment on a level or magnitude of changes on a meeting-by-meeting basis. It
contains sensitivity scenarios that differ from the central one and have a significant
probability of occurrence, in which monetary policy could follow a different path. The
sensitivities around our central projection scenario, this time are mainly related to the
evolution of local demand and/or the persistence of increase in inflation (Figure 9).
MONETARY POLICY: COMMITTED TO CONTROLLING INFLATION IN THE FACE OF
FUTURE CHALLENGES
As you have been able to observe, and as I mentioned previously, although the scenario
for monetary policy is not free of challenges to return to 3% inflation, today we are in a
framework more associated with more normal times, where a supply shock, such as
the increase in electric prices, can be accommodated within the policy horizon,
keeping expectations anchored and without the need to overreact with the MPR.
Beyond monetary policy, our economy has challenges to face. Although we have
controlled inflation and resolved the significant imbalances generated by some of the
measures adopted during the pandemic, other effects are still being felt. An important
challenge is that the stock of long-term savings in our economy has been unable to
recover the size it lost after the three withdrawals of pension savings.
This leaves us more exposed to external financing, in a context in which long-term rates
have risen globally and there is uncertainty about various structural factors. Not to
mention the stabilizing effect that institutional agents that manage long-term savings
have often played is practically no longer present.
Another important challenge is how to resume higher medium-term growth. In the
Report we published last week, we updated the structural parameters of the Chilean
economy, including trend or medium-term growth. This is an exercise that we do on a
regular basis, as it serves as a guide to evaluate the current state of the
macroeconomy, and to calibrate monetary policy accordingly.
This IPoM estimate shows virtually no change from the previous year. Trend GDP
growth will slow over the course of the next decade, averaging 1.8% over the 2025-2034
period. The question that arises from this figure, and which we asked Congress in our
presentation, is whether we are happy with it. Judging from the reactions, the answer
is no.
Going back to what we mentioned before Congress, facing this challenge and
overcoming it requires from all of us, good public policies, creativity, and public and
private effort. Of solid institutions. Of a significant and persistent effort. The positive
thing is that we have opportunities. In fact, the mere fact of attending these Chile Day
meetings shows the interest to face these challenges.
Today's world is challenging for a small, open economy such as ours, particularly in a
geopolitical scenario where various fronts of tension have been building up. We are not
big enough to generate scale advantages in our markets, including our productive
matrix. On the other hand, aspects such as climate change or technological innovation
could imply a great potential for the development of important productive sectors in
the country, but we still know little about their impact on the economy as a whole, or
whether we will be able to have the flexibility and adaptability essential for this new
environment.
We cannot yet even quantify what the magnitude and timing of some of these
developments will be. However, as our economy moves into the future, our mandate is
to keep inflation under control and ensure the stability of domestic and external
payments. Our work will continue day-to-day to be committed to these objectives.
For this, we have our policy framework which, as I mentioned at the beginning, has
given proof of its value in circumstances as complex as those we have experienced in
recent years. With a simultaneity of supply and demand shocks, and with
characteristics and persistence that had not happened in this way in decades. But its
attributes came to light, allowing inflation to return to levels compatible with the target.
We have been clear and have seen with concrete evidence that monetary policy has
done its job. The good results obtained during the last 25 years in which we have
operated under this scheme have given credibility to the Central Bank's actions. But
this does not put us in passive mode. On the contrary, it encourages us to continue
acting with the certainty that the framework at our disposal has been effective.
It is also important to highlight that, as a result of the challenges that arose during the
pandemic, the law was adjusted to have a wider range of instruments to face new
crises. These include, among others, the possibility of temporarily acquiring bonds
issued by the Treasury in the secondary market under very exceptional circumstances,
the possibility of implementing repos with non-bank agents, following the approval of
the resilience law, and the option of acquiring bank bonds from entities supervised by
the Financial Markets Commission and the Superintendency of Pensions in stress
situations.
I would like to end this presentation by reaffirming that there should be no doubt about
our commitment to the inflation target and that we will take all the necessary decisions
to meet it. The period of high inflation reminded us of the costs to society of not
controlling this phenomenon, which is particularly harmful to those who lack the
resources to deal with it. The Central Bank has a legal mandate to control inflation, but
this is also a commitment to society that becomes especially relevant in view of our
first centenary. This is to contribute to a macroeconomic balance that favors the
growth of the country and the welfare of all its inhabitants.
Thank you.
Figure 1
Monetary policy rate (MPR) Headline inflation (*)
(percent) (annual change, percent)
12
16
14
10
12
8
10
6
8
6
4
4
2
2
0
0
19 20 21 22 23 24
19 20 21 22 23 24
(*) Series consider the 2023 CPI reference basket and the splice made by the Central Bank of Chile.
Sources: Central Bank of Chile and National Statistics Institute.
Figure 2
Gross domestic product Monthly activity (Imacec) (*)
(index, 2018 =100, seasonally adjusted series) (index, 2018 =100, seasonally adjusted series)
Wholesale and retail trade
120 Total GDP 130
Manufacturing
Mining GDP
Services
Non-mining GDP
120
Other goods
110
110
100 100
90
90
80
80 70
18 19 20 21 22 23 24 18 19 20 21 22 23 24
(*) Other goods series considers agricultural-forestry activities, fishing, electricity, gas and water supply, and
construction. Source: Central Bank of Chile.
Figure 3
Private consumption Real wage bill (*)
(index, 2018 =100, seasonally adjusted series) (index, 2019=100, seasonally adjusted)
Private consumption 110
Durable goods
160
Non-durable goods
105
Services
100
140
95
120
90
100
85
80
80
75
60
19 20 21 22 23 24
18 19 20 21 22 23 24
(*) Calculated using seasonally-adjusted series of the real LCI, hours worked and occupation.
Sources: Central Bank of Chile and National Statistics Institute.
Figure 4
Gross fixed capital formation (GFCF) Real investment according to
microdata (1)(2)(3)
(index, 2018 =100, seasonally adjusted series) (2018=100, quarterly seasonally adjusted series)
GFCF
130 200 Mining Other sectors
Construction and other investment works
Machinery and equipment
120 180
110 160
100
140
90 120
80
100
70 80
18 19 20 21 22 23 24
19 20 21 22 23 24
(1) These figures correspond to an approximation of investment data based on high frequency information
subject to revisions, they do not necessarily represent National Accounts figures. (2) Other sectors do not
consider investment in the energy sector. (3) For more details, see Minutes of the September 2024 IPoM.
Sources: Central Bank of Chile, National Customs Service and the Tax Administration.
Figure 5
Inflation (1) Annual inflation expectations (surveys)
(annual change, percent) (percent)
EEE 1y EEE 2y
15 Total Core (without volatiles) 10
EOF 1y EOF 2y
12 8
9 6
6 4
3 2
0
0
18 19 20 21 22 23 24
20 21 22 23 24
(1) Series consider the 2023 CPI reference basket and the splice made by the Central Bank of Chile. (2)
Median of responses are shown. (3) EOF considers the survey from the first half in January 2018. From
February 2018 onwards, it considers the last survey published in the month. Sources: Central Bank of
Chile and National Statistics Institute.
Figure 6
Currencies (1)(2)(3) Interest rates on nominal 10-year bonds (1)(2)
(index 1.Jan.24=100) (difference with respect to 1.Jan.24, basis points)
U.S. U.S.
Eurozone Eurozone
Chile
Chile
Latin America (right axis)
Latin America
115
125 300
100
200
110
75
100
105
50
0
25
100
-100
0
95
-25 -200
Jan.24 Mar.24 May.24 Jul.24 Sep.24
Jan.24 Mar.24 May.24 Jul.24 Sep.24
(1) For Latin America, considers the simple average of Brazil, Mexico, Colombia and Peru. (2) Dashed vertical line
marks statistical cut-off of June 2024 IPoM. (3) An increase in the index indicates a depreciation of the currency
and a decrease an appreciation. For the U.S., the multilateral dollar index (inverted) calculated by the Federal
Reserve is used. Sources: Central Bank of Chile and Bloomberg.
Table 1
GDP growth projections (*)
(annual change, percent)
3.0%
June
September
2.75%
2024
2024
2024
2.25%
2.25%
1.5% 1.5%
June September
2025
2024 2024
2.5% 2.5%
1.5% 1.5%
June September
2026
2024 2024
2.5% 2.5%
(*) Projections included in each Monetary Policy Report. Symbols on the right indicate change compared to
June 2024 projection. Source: Central Bank of Chile.
Figure 7
Private consumption projections (*) GFCF projections (*)
(annual change, percent) (annual change, percent)
24 18
15
20
12
16
9
12
6
8
3
0
4
-3
0
-6
-4
-9
-8 -12
15 16 17 18 19 20 21 22 23 15 16 17 18 19 20 21 22 23
24(f) 25(f) 26(f) 24(f) 25(f) 26(f)
(f) Forecasts. (*) Red diamonds correspond to the projections of the June 2024 Monetary Policy Report.
Source: Central Bank of Chile.
Figure 8
Total CPI projections (*) Core CPI projections (*)
(annual change, percent) (annual change, percent)
14 Core CPI
Total CPI
14
Jun.24 IPoM
Jun.24 IPoM
Sep.24 IPoM
12
12 Sep.24 IPoM
Projections Projections
3Q24 to 3Q26 3Q24 to 3Q26
10
10
8
8
6
6
4
4
2
2
0
0
19 20 21 22 23 24 25 26
19 20 21 22 23 24 25 26
(*) Series consider the 2023 CPI reference basket and the splice made by the Central Bank of Chile.
Sources: Central Bank of Chile and National Statistics Institute.
Figure 9
MPR corridor (*)
(quarterly average, percent)
Corridor EOF EEE Forward MPR MPR Sep.24
13
12
11
109876543210
21.I 22.I 23.I 24.I 25.I 26.I
21.II 22.II 23.II 24.II 25.II 26.II
21.III 22.III 23.III 24.III 25.III 26.III
21.IV 22.IV 23.IV 24.IV 25.IV
(*) The 2025 and 2026 calendar considers two MP meetings per quarter. The corridor is built by following the
methodology described in boxes V.1 of March 2020 Report and V.3 of March 2022 Report. It includes the
August Economic expectations survey (EEE) and September pre-MP meeting Financial traders survey (EOF)
and the quarterly average smoothed forward curve as of August 28. This is calculated by extracting the
implicit MPR considering the forward curve over the overnight index swap (OIS) curve for up to 2 years,
discounting the fixed rates of each maturity at the simple accrual of the OIS index. For the current quarter, the
surveys and the forward curve consider the average of daily actual data and are completed with respective
sources. Quarterly average considers working days in each quarter. Gray diamond corresponds to the MP
decision of September 2024. Source: Central Bank of Chile.