Summer is Hot, But the Economy Stays Cold
The Central Bank’s latest Monetary Policy Report, published in December, contains few changes in monetary policy rate (TPM) outlook from the last report, published in September, though it is slightly more hawkish. The Bank sees the negative pressure of slower growth as more than offset by peso depreciation, and the persistence of inflation. The Bank also revised economic growth downward, from 2.5%-3.5%, to 2.0%-3.0%. Even that seems too optimistic: Market expectations, and our own forecasts, are closer to 2% for 2016, or even lower.
The report reinforces the view that the exchange rate is one of the main variables behind the TPM hikes, and explicitly states that the Board considers the peso somewhat under-valued. The Bank is implicitly suggesting a stance that would bring two 25 bp hikes in 2016.
November retail sales surprised analysts on the upside, with the biggest 12-month increase since February 2014. But we’ll have to wait for December results to know whether 2015 Christmas sales were stronger, or whether consumers anticipated their purchases. Manufacturing production fell in November, and continues to disappoint. Mining production expanded slightly.
Unemployment fell, for seasonal reasons, but continues to be stable, the economic slowdown notwithstanding. Factors that might help explain low unemployment include growing public employment, and the slow increase in the number of people entering the labor force. But there are some signs that things are changing.
CPI in November was more or less flat on October. While the 12-month change was stable in November, the core measures fell further. The fall in core inflation could indicate that deflationary pressures are cropping up. But a single signal is insufficient to establish a trend.
In politics, the Michelle Bachelet government claims to have met one of its main campaign promises by pushing through a law that offers free university tuition. Yet the policy is full of contradictions, and seems to have left no one happy, guaranteeing that the educational debate will continue for years.
It’s critical that the office of the Comptroller General of the Republic, under new Comptroller General Jorge Bermudez, show strong leadership in enforcing standards of ethical behavior, given the recent cases of low ethical standards among public servants. Bermudez has very little time to demonstrate what kind of enforcement leadership he will offer, particularly since predecessor Ramiro Mendoza earned a well-deserved reputation for independence.
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