I have waited so long

CHILE - Report 15 Jun 2015 by Igal Magendzo, Robert Funk and Alberto Etchegaray

Executive summary

How long are we going to wait for economic activity to go up, inflation to go down, and the Central Bank to start normalizing rates?

The latest National Accounts show the economy on a seeming acceleration path. Even though this is good news, there are a few caveats to take into account. The value added of sectors related to the public goods has been playing a non-negligible role. "Private" GDP grew less than total GDP. Also important is the fact that the first quarter of 2015 had more trading days than the first quarter of 2014. Moreover, our favorite coincident indicators of economic activity show no positive signs. Last but not least, the Monthly Economic Activity Index (IMACEC) shows that throughout the first quarter of the year, the economy decelerated.

Consumption is stagnant, the latest retail sales data suggest. This variable has been flat for the last two years. This, together with the data on consumption goods imports, strongly suggests that consumers are watching their pockets.

The economy decelerated, the exchange rate appreciated and international inflation is low. Nevertheless, domestic inflation continues to be above 4%. The pass-through from the 2013/2014 devaluation of the exchange rate to consumer prices may not be over yet. In any case, we continue to expect inflation to fall in response to the other contractionary factors, such as slow economic activity and low international inflation.

The Central Bank's dilemma continues to be the anemic growth on the one hand and the stubbornly high inflation on the other. The international scenario has taken central stage in the Board's discussion, in particular the probable course of the Fed Funds rate. In any case, as long as investment does not pick up, the Central Bank will not raise the monetary policy interest rate. We are becoming more and more uncertain about the next move of the Central Bank, both in terms of timing and direction. Asset prices reflect this increase in uncertainty.

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