Chile central bank delves into unconventional toolbox - Capital Economics
Latin America Economics

Chile central bank delves into unconventional toolbox

Latin America Economics Update
Written by Quinn Markwith

The decision by Chile’s central bank to leave its policy interest rate unchanged at 0.50% was accompanied by a statement which appeared to unveil a QE programme. The finer details will be fleshed out in the coming days but, along with a recently announced fiscal stimulus, unconventional monetary easing should help to ease some of the headwinds to activity.

  • The decision by Chile’s central bank to leave its policy interest rate unchanged at 0.50% was accompanied by a statement which appeared to unveil a QE programme. The finer details will be fleshed out in the coming days but, along with a recently announced fiscal stimulus, unconventional monetary easing should help to ease some of the headwinds to activity.
  • Back in March, Chile’s central bank – along with many others in the emerging world – announced a bond purchase programme. But this was designed to support financial stability and liquidity during the height of the market panic rather than to loosen monetary conditions explicitly.
  • Having subsequently cut its policy rate to near rock bottom, we argued that the central bank might soon have to adopt a formal QE programme to loosen monetary policy further. (See here.)Yesterday’s statement appears to have made that announcement.
  • The board reiterated that the policy rate is at its “technical minimum”, but that the economy “requires an intensification of the monetary boost”. As a result, the board said that it would need to “expand its use of unconventional measures”, including a “special asset purchase programme” worth $8bn (2.6% of GDP). In other words, these asset purchases are designed primarily to loosen monetary conditions.
  • Other details on the QE-style programme, including the type of assets to be purchased, will be announced in the coming days, most likely at today’s Inflation Report press conference. But it’s worth emphasising that, as things stand, the central bank is only legally permitted to purchase bank and financial corporate bonds. A bill currently in the Senate – if passed – would lift this restriction, potentially allowing the central bank to purchase sovereign and non-financial corporate bonds too.
  • The proximate trigger for the decision to announce QE appears to have been the extension of Chile’s lockdown. The central bank acknowledged in its statement that activity will “fall to new depths in May and June due to the extension and duration of the containment measures”. Indeed, our trackers show that activity remains stagnant in Chile even as it is gradually recovering elsewhere in the region. (See Chart 1.)
  • We think that policymakers are dipping their toes in the water for now. Provided that investors take the announcement in their stride, an expansion of this asset purchase programme is more likely than not. First, the size of the asset purchases is small, just half the size of the central bank’s lending facility programme, FCIC ($16bn).
  • Second, if legal restrictions on the purchase of sovereign debt is lifted, the central bank would likely be tempted to begin buying sovereign debt. After all, while bank bond spreads are already very low, the local currency government bond yield curve is still quite steep. (See Chart 2.) Finally, as we’ve noted previously, Chile’s inflation expectations are well-entrenched at a low rate, and the central bank is highly credible. And with economic activity set to remain depressed, the need for further unconventional support will grow.

Chart 1: CE Covid Recovery Trackers (% diff from Jan-Feb. median, 7-day moving averages)

Chart 2: Chile Local Curr. Sov. Bond Yield Curve

Sources: Apple, Google, Moovit, Capital Economics

Sources: Refinitiv, Banco Central de Chile


Quinn Markwith, Latin American Economist, quinn.markwith@capitaleconomics.com