Chile’s central bank cut its monetary policy rate by 75 basis points to 1.0 percent to ease the negative impact on the economy from the global spread of the coronavirus and launch a set of measures “to ensure the normal functioning of credit markets and the effective transmission the increased monetary stimulus.”
It is the Central Bank of Chile’s first rate cut since October 2019 and the second since June 2019, with the rate now haven been cut by a total of 200 basis points.
Although economic data for Chile has yet to reflect the disruptive impact of the virus, the central bank said experience from other countries suggest “the impact on sales and cash flows of the affected companies could be substantial, particularly for small and medium-sized enterprises,” the bank said.
“In these circumstances, the Board has decided to carry out a set of actions aimed at mitigating the negative impacts of these events and smooth the process of adjustments that the Chilean economy will have to deal with,” it said.
In addition to the rate cut, the central bank opened a 6-month, conditional funding facility (FCIC) with 4-year loans at interest rates equal to the monetary policy rate.
The central bank said corporate bonds will now be included as collateral for all effective liquidity operations and a banking bond purchase program will be establishes for participants in the open market operations system for up to US$4 billion and finally foreign currency sales will be extended until Jan. 9, 2021.
“The Board estimates that this set of measures will help the economy adjust to this new scenario, by mitigating its impact on households and businesses,” the central bank said.
Further changes in monetary policy, or additional measures, will depend on the evolution of the macroeconomic outlook, the functioning of financial markets and the fulfillment of the bank’s inflation target and financial stability objectives.
The rate cut was decided by the bank’s board at a special meeting, with the board split in its decision regarding the rate cut. The Governor Mario Marcel, the vice governor and a third board member voting to cut the rate by 75 basis points while two other board members voted to cut the rate by 50 points.
The decision regarding the additional easing measures was unanimous. The next policy meeting is scheduled for March 31.
This article was originally published on Central Bank News on March 16, 2020. It is reproduced here with permission from the author.