The Mandate

One of the Central Bank’s objectives, established in Section 3 of the Basic Constitutional Act, is to safeguard the stability of the currency, that is, to keep inflation low and stable.

Low, stable inflation promotes job growth and protects the income of the most vulnerable segments of society, while also creating the conditions for the economy to stay on a sustainable growth path, with full employment and, in general, progress and well-being for the population.

In exercise of the authority granted by the Basic Constitutional Act to meet this objective, in 1999 the Bank adopted an inflation-targeting monetary policy scheme and a flexible exchange rate policy.

The target established under this scheme is for annual inflation (measured as the percent change in the CPI in a 12-month period) to stay around 3% most of the time, within a range of plus or minus one percentage point. Additionally, the objective specifies that inflation should reach 3% in a horizon of 24 months.

The Central Bank’s main instrument for keeping inflation in line with the target is the so-called monetary policy rate (MPR), which is set at each Monetary Policy Meeting. The Bank uses a range of operations, described below, to influence the interest rate on overnight interbank loans, so that it stays close to the MPR. This, in turn, affects the supply and demand for money. Finally, all of these factors have an impact—with a lag—on prices in the economy.

In the year, the Board held eight Monetary Policy Meetings to determine the MPR and published four Monetary Policy Reports. The reports contain an exhaustive analysis of the national and international macroeconomic scenario for the current year and the next two years, as well as growth and inflation forecasts for the short, medium, and long terms.

4.1 General Economic Climate in 2018

Over the course of 2018, annual inflation increased, from under 2% throughout most of the second half of 2017 to around 3% in the second half of 2018, ending the year at 2.6%.

Inflation averaged 2.1% in the first half and 2.8% in the second. The increase is explained, in part, by the more volatile components of the CPI and the depreciation of the peso. At the same time, inflation of the basket items that are more sensitive to the output gap—namely, services and nontradables—increased steadily along the year.

Core inflation—the CPI excluding food and energy prices, or CPIEFE—rose from 1.6% annually in January 2018 to 2.3% in December. This is in line with the recovery of the growth rate and the clearly expansionary monetary policy.¹/

^1/ Starting in January 2019, The National Statistics Institute began to measure the CPI using a new basket and calculation methodology, with base year 2018=100. This translates into a lower CPI for 2018 and a lower starting point for inflation as of 2019.

As mentioned, the output recovery that started in late 2017 continued in 2018, reaching an annual growth rate of 4%.

Annual GDP growth rates were lower in the second half of the year than in the first, as the economy was growing closer to potential (between 3.0 and 3.5%), the basis of comparison had increased, and the one-off factors that favored economic growth in the first half had dissipated. In particular, the mining sector recorded a strong increase in the growth rate in the first half, largely due to the low basis of comparison deriving from the strike at La Escondida mine in the same period of 2017.

Furthermore, there were some one-off factors in 2018 that had a negative effect on the performance of the economy, such as the number and composition of business days.

With regard to the nonmining sectors, activities associated with investment in machinery and equipment were dynamic throughout the year, while those related to investment in construction began to pick up in the latter part of 2018.

In the industrial sector, there was a recovery in some export-oriented activities. This was reflected in the increase in manufacturing shipments, which recorded the highest growth rate of the past few years.

In line with the output side, the increase in domestic spending in 2018 was led by the positive performance of investment in machinery and equipment, with strong capital goods imports. Consumption remained more dynamic than in previous years, despite a slowdown in its annual growth rate in the second half of the year. Underlying this trend, the labor market has been able to absorb the large influx of immigrants in recent years, as evident in the behavior of wages and in job statistics adjusted for this factor. Domestic financial conditions remained favorable, with low credit costs and an improvement in qualitative indicators over the course of the year.

In particular, in the second half of the year, the Bank Lending Survey carried out by the Central Bank showed a strengthening in demand in certain segments, as well as looser lending conditions for some portfolios.

With regard to external conditions that affect the Chilean economy, the world economic growth cycle peaked between late 2017 and early 2018. This was followed by a gradual slowdown, with variation among economies.

In the developed world, the United States recorded a better performance than its peers throughout most of 2018. This divergence was reflected in the behavior of prices, exacerbating the differences in the monetary policy stimulus. Toward the end of the year, the main central banks were communicating that they would maintain their current monetary policies for a longer period than previously expected.

In the emerging world, China gradually slowed over the course of the year, with periods of heightened fears of a sharper slowdown. In response, the authorities took measures to stimulate the economy.

In Latin America, the growth forecasts for Brazil and Argentina were revised downward in 2018, due to the development of macroeconomic vulnerabilities or idiosyncratic factors that made it difficult to adopt the necessary policies for the sustainable development of their economies.

In this context, the process of normalizing financial conditions in the developed world was absorbed by the emerging countries without any major disruptions. Although there were periods when financial conditions tightened for economies perceived as having weaker macroeconomic fundamentals, the situation eased somewhat at the end of 2018, when these economies either announced emergency measures or saw an improvement in their political evolution.

In addition, the news over the course of 2018 continued to generate uncertainty and episodes of risk aversion and volatility. The most important events included the following: (i) the trade conflict between the United States and China; (ii) the aforementioned real and expected divergence in monetary policy in the United States versus other developed countries; (iii) concerns about the United Kingdom’s exit from the European Union; and (iv) doubts regarding the Chinese economy. The confluence of these developments triggered substantial fluctuations in the global financial markets over the course of the year.

In Chile, these episodes were mainly manifested in exchange rate volatility, whereas long-term interest rates and risk premiums were largely unaffected by the adjustments, in line with the stabilizing role of the floating exchange rate in the policy framework.

Over and above the aforementioned volatility, the peso depreciated in the year, from around $600 to the dollar in early 2018 to around $690 to the dollar at year-end.

With regard to commodity prices, oil fell on the order of 25% between the start and end of 2018, closing the year around US$45 per barrel. In between, the oil price rose to nearly US$70 per barrel, generating concerns about the impact on global inflation. The increase was mainly due to geopolitical tensions and a larger drawdown of oil inventories than projected.

The copper price peaked at US$3.20 per pound mid-year. It subsequently descended, albeit with fluctuations, mainly in response to doubts about the Chinese economy and uncertainty regarding the evolution of the trade war with the United States. Late in the year, the price fluctuated between US$2.70 and 2.90 per pound, around its estimated long-term level.

FROM JANUARY TO SEPTEMBER, THE INTEREST RATE WAS 2.5%. IT INCREASED TO 2.75% IN OCTOBER, WHERE IT STAYED THROUGH THE END OF THE YEAR.

4.2 Monetary Policy

Starting in 2018, the Board of the Central Bank of Chile introduced some modifications to the monetary policy decisionmaking and communication process.

These modifications are part of the 2018–2022 Strategic Plan and are aimed at strengthening the decisionmaking process, reinforcing internal analytical capabilities, and improving the quantity, quality, and timeliness of the information reported to the public.

Starting in January, the following changes were implemented:

1. I. The number of Monetary Policy Meetings was reduced from twelve to eight per year.
2. II. The meeting lasts one day when it coincides with the publication of the Monetary Policy Report and two days when it does not, starting the afternoon before the day on which the policy decision is scheduled to be announced.
3. III. The press release on the Monetary Policy Meeting is published at 18:00 on the second day of the meeting. It is more extensive than the previous version, covering the most important economic trends considered in the analysis, the basis for the decision adopted by the Board, and how the Members voted.
4. IV. The minutes from the Monetary Policy Meeting, which are published on the eleventh business day after the meeting, still provide detailed information on the issues analyzed and discussed, the monetary policy options considered, and the Board’s main arguments for the monetary policy decision. They also include the background material and the main graphs presented at the meeting by the Monetary Policy Division.
5. V. The full record of the Monetary Policy Meetings began to be published in 2018, with a ten-year lag. This record contains more detailed information on the issues analyzed and the opinions expressed by the participants, identifying the speakers and, therefore, the opinions held. Last year, 96 full records were published, covering the Monetary Policy Meetings held between 2000 and 2007.
6. VI. The Monetary Policy Report continues to be published four times a year, early on the first day following the Monetary Policy Meeting in March, June, September, and December, when the Governor gives a press conference at the Central Bank. The Report is presented to the Senate immediately after publication. In 2018, the Governor, accompanied by Members of the Board, presented the Monetary Policy Report to the Senate Finance Committee on 2 April, 14 June, and 5 December, and to the full Senate on 5 September.
7. VII. The Monetary Policy Report is now published separately from the Financial Stability Report, as was the case through 2009. The Financial Stability Report was presented to the Senate Finance Committee on 16 May and 14 November.

ANNUAL INFLATION IN DECEMBER 2018 WAS 2.6%, WHICH IS WITHIN THE TOLERANCE RANGE ESTABLISHED BY THE CENTRAL BANK.

With regard to monetary policy decisions, in the first half of the year, the Board continued to endorse the option of increasing the monetary stimulus, primarily because the low inflation represented a risk for convergence to the target within the policy horizon.

As the year progressed, growth continued to recover, and the risks for inflation convergence to the target declined. Thus, the Board deemed that a further reduction to the MPR was no longer plausible.

As the output gap narrowed and inflation showed signs of converging to 3%, the Board considered that the economy no longer needed such a large stimulus. Therefore, they began to study the option of increasing the MPR starting in June, and the first hike, of 25 basis points, was implemented at the October meeting. At the same time, the Board signaled that the process of reducing the monetary stimulus would continue to be gradual and cautious.

4.3 Monetary Management

To support the implementation of monetary policy, the Bank monitors market liquidity and employs the mechanisms and instruments at its disposal to ensure that the interbank interest rate—that is, the interest rate that banks charge other banks for overnight loans—remains around the monetary policy rate (MPR).

This is achieved through the short- and medium-term liquidity management schedule, which specifies the auction of Central Bank discount promissory notes (PDBC) and bonds (BCP and BCU), as well as other open market operations and standing facilities. In addition, market liquidity forecasts are revised daily and, when necessary, monetary adjustment operations are carried out to facilitate the convergence of the interbank rate to the MPR.

In 2018, there was no absolute deviation of the interbank rate from the MPR, so it was not necessary to execute any monetary adjustment operations.

The implementation of monetary policy is also linked to the Bank’s debt management. This is mainly oriented toward managing the short-, medium-, and long-term liquidity in the financial system, in order to withdraw any structural liquidity surplus from the market, which can affect the Bank’s operations.

As in years past, the Bank announced its annual bond auction calendar in early January, which considered scheduled debt maturities for an amount equivalent to Ch$2.750 trillion, of which Ch$2.000 trillion would be absorbed through Central Bank discount promissory notes (PDBC).

4.4 Debt Management

As in the past, the Central Bank accepted the role of fiscal agent in the placement of General Treasury bonds to be issued during the year. This involved auctioning peso- and UF-denominated General Treasury bond series issued in 2018 (with maturity dates of 5, 12, 20, and 30 years in each case) and reopening series issued in 2014 and 2015 for UF-denominated bonds and in 2013 and 2014 for peso bonds.

Also in its role of fiscal agent, the Bank implemented a General Treasury bond buyback program, in which additional bonds in the aforementioned series were auctioned, with other General Treasury bonds from earlier series received in payment.

The General Treasury bonds were all issued in accordance with the provisions of Article 104 of the Income Tax Law.

In accordance with both the Bank’s information disclosure policy and the stipulations of the Fiscal Agency Decree, Appendix III provides more details on the Bank’s management of the Economic and Social Stabilization Fund (ESSF) and the Pension Reserve Fund (PRF).

4.5 Regional Visits

With the publication of each Monetary Policy Report, the Bank makes an effort to coordinate presentations of the report in the different regions of the country. This is achieved through the organization of regional meetings, where one Board Member discusses the Report, together with complementary information relevant to the region. These presentations are attended by diverse local audiences, including participants from local businesses, academia, government, trade associations, and production spheres.

In 2018, there were 15 regional meetings, organized in conjunction with a regional university or trade association, including the Manufacturing Development Association (Sofofa), the Chilean Chamber of Construction (CChC), the Atacama Regional Development Corporation (Corproa), the Araucanía Production Development Corporation, the Maule Regional Progress Board, the University of Biobío, and the University Austral of Chile.

All four the Monetary Policy Reports were presented by the Central Bank Governor at a seminar organized by Icare in Santiago.