The Central Bank delivered a new Monetary Policy Report (IPoM), this time for the month of September, which includes the latest economic events, such as the sharp slowdown in activity, inflation that is already over 13% per year and the result of the constitutional plebiscite on Sunday that gave a comfortable victory to the Rejection.
a deeper recession
The issuing institute improved its GDP growth projections for this year, increasing the lower part of the range from 1.5% to 1.75% in relation to the June report, but adjusting the ceiling downwards by the same magnitude, from 2.5% to 2.25 percent. This is due to a pace of expansion that has surprised at the beginning of the year, but has slowed down more recently.
“The data for the second quarter and the beginning of the third indicate that the economy continued in the adjustment process after the strong imbalances accumulated in 2021,” the bank said in the report.
Where the downward adjustment was most evident was in the scenario for 2023, deepening the bet on a contraction of the economy.
Specifically, the issuer went from expecting a range between a 0% rise and a 1% drop in 2023 in June, to now oscillating between a 0.5% and 1.5% contraction next year.
The reason? “The activity projection considers that private consumption will continue to adjust, a result that is derived in large part from the end of the bulky income support measures adopted in 2021, as well as from the restrictiveness of monetary policy,” said the Council, alluding to the reversal of the “accumulated imbalances” in the last two years.
In the central scenario, the advisers foresee that the economy will grow below its potential for several more quarters, with which the gap (between trend GDP and actual GDP) “will continue to narrow and will be located at negative levels from the end of of this year”.
The projection for 2024 remained in an expansion between 2.25% and 3.25 percent.
Concern about persistent inflation
In line with the above-expected rise in inflation, the bank continued to adjust its price scenario.
Thus, it forecasts that the Consumer Price Index (CPI) will close the year at 12%, 2.1 percentage points above the June IPoM projection. For 2023, the adjustment was six tenths to 3.3%, while a year later it stood at 3%, the same as three months ago.
The Council warned in this report that although prices should begin to ease, in line with the slowdown in the economy and the more restrictive monetary policy, there are dangers that could make the increase in the cost of living more persistent.
In the central scenario, the entity estimates that total inflation is “close to reaching its maximum level in this cycle, which is still expected to occur in the third quarter of this year,” said the issuer.
“The projections of the central scenario consider that the pace of price increases will decrease in the coming months and annual inflation will begin to fall. However, the risk of observing a much more persistent inflationary phenomenon is a concern for the Board. If it materializes , could lead to greater monetary restrictiveness, outside the upper limit of the TPM corridor,” commented the advisers in the report, who pointed out that the most likely scenario is the return of inflation to the 3% target in 2024.
How high is the rate?
In line with the above, the bank reiterated the message of the Monetary Policy Meeting (RPM) on Tuesday, when it surprised the market with an increase of 100 basis points, to bring the interest rate to 10.75 percent.
“This risk (of a persistent increase in inflation) is especially relevant in a context where inflation has surprised on the upside for several quarters and inflation expectations remain above 3% two years ahead. Quickly recovering macroeconomic balances will help reduce this risk.” , at the same time that it will allow the Chilean economy to adequately face a greater deterioration of the external scenario,” explained the issuing institute.
Along with reiterating that the rate is located “around the maximum level considered in the central scenario of this Report”, the bank pointed out that the next movements will depend on the evolution of the macroeconomic scenario and its implications for the convergence of inflation to the target. .
“The Board will remain especially attentive to upward risks for inflation, both due to the high level it has reached and the fact that two-year-term inflation expectations remain above 3%,” they stressed.
“The objective of the Central Bank is to ensure that the convergence of inflation occurs with an adjustment in terms of economic activity that is brief, orderly and as inexpensive as possible,” they concluded.
Investment and consumption suffer
As has been the trend in recent reports, the bank adjusted its forecasts for the main components of domestic demand.
Thus, it cut its bet for the growth of total consumption this year by six tenths, to 2.2%, while for 2023 the adjustment was nine tenths, now expecting a drop of 4.6 percent.
On the investment side, the bank sees a drop of 3.3% this year, less than the 4.8% decline it forecast in the June Report. However, in 2023 the contraction deepens to 4.7%, 2.5 percentage points worse than estimated three months ago.
“In investment, a weak performance is anticipated during the remainder of 2022 and all of 2023, reflecting less favorable financial conditions, greater corporate pessimism, a higher real exchange rate and uncertainty that is falling, but slowly” explained the monetary authorities.
The implications of the electoral result
Due to the closeness of the preparation of the IPoM with the exit referendum, where the draft of the new Constitution was rejected, the issuing institute did not delve much into its implications, but it did anticipate a reduction in uncertainty after the result.
“The central scenario does not consider a specific effect on the economy due to the result of the plebiscite. This assumes that uncertainty will gradually reduce in the coming quarters, in the midst of a process where institutional changes continueallowing the proper functioning of the institutions and the economy,” the directors pointed out.
Is the checking account starting to adjust?
One of the warning lights that the Central Bank has turned on recently is the high current account deficit, which accumulated a negative balance that represented 8.5% of the Product at the end of the second quarter, “still reflecting the magnitude of the imbalances of 2021, which were later joined by a deterioration in the terms of trade and high transport costs”.
As explained by the bank, the “imbalance” is explained because the government’s saving-spending ratio played a predominant role, as a result of the income support measures that were adopted during 2021, while households also showed a “significant imbalance” , due to the liquidation of savings that involved the withdrawal of pension funds to finance higher levels of private consumption.
The issuing institute, however, expects the balance to fade to close the year at 6.3% of GDP and 3.6% in 2023, less than the 6.6% and 4.5% anticipated three months ago, respectively.
“Although the relevance of these phenomena has been receding, this will only begin to be visible in the current account balance in the second half of this year,” the directors concluded.
What will be the reasons? “The non-repetition of income stimulus measures will cause both public and household savings to improve drastically compared to what was observed the previous year, with which the current account deficit will have a significant drop as of the second semester this year. Higher interest rates, the high level of the exchange rate and the reduction of international transport costs will also collaborate in this,” they explained.
