SANTIAGO -- The minutes from the Chile Central Bank's July 14 monetary policy meeting show that the decision by the central bank’s board to leave the overnight rate unchanged at 3.0% was unanimous and that this was the only plausible option the board assessed.

Board members ruled out an interest rate cut given the context of high inflation levels and of prevailing risks to the exchange rate that could have short-term effects on inflation.

Meanwhile, an interest rate increase did not seem plausible either, given systematic downward revisions to growth forecasts.

One member argued that, in the case of a gradual recovery of the economy, which appeared to be the most probable scenario, the monetary policy would have to remain at the actual expansionary level for various
quarters. He added, however, that this was subject to the convergence of inflation to the target within a reasonable time; if this weren’t the case, an adjustment of the monetary policy rate would be necessary.

Another member indicated that, due to the difficulty of sustaining any other monetary policy option, the only clear alternative was leaving the overnight rate unchanged. Additionally, he pointed out that it is not common for the board to consider maintaining the rate unchanged as the only relevant option for such a prolonged time; yet, in the actual circumstances, there is not much space for monetary policy flexibility.

Another member justified his vote by arguing that the persistence of inflation paired with the risks it carries left no space for any other monetary policy option, as a cut could be discarded as unfounded and a hike was not possible with an increasingly weaker economy.

On the growth front, the minutes show that all members highlighted the unexpectedly weak performance of the activity in the past month, which would likely lead to lower annual growth figures than those considered in their last
monetary policy report.

Various members discussed the evolution of the labor market and the slowdown of nominal wages.

One member argued that the labor market seems to be gradually transiting to a normalization process; another member pointed out that the slowdown of nominal wages confirmed the fact that the expansion presented in the past quarters wasn’t due to tightness in the labor market but to base effects of the inflationary shock.

Meanwhile, on the inflation front, all members expressed their concern towards its prevailing high levels and the fact that annual inflation remains above the upper-end of the variability interval around the 3.0% target. Various members added that led them to believe that inflation will remain in the upper bound of the bank’s tolerance interval in the following months, resulting in a slower-than-expected convergence to the target.