Too skinny for a diet
For the past several quarters the Central Bank has faced a dilemma. On one hand, inflation has run relatively high for quite a long time. On the other, economic activity is sluggish, and there is no sign of a recovery. Apparently the Board cares more about short-run inflation; the Board announced that the Central Bank will start to hike rates soon, before year-end.
According to the Central Bank, economic activity has bottomed out, and we are now on our way to recovery. The problem is that economic data shows no evidence of this. Business confidence, retail sales and imports all point in the opposite direction. Only the construction sector continues to take advantage of the sales boom caused by the anticipation of a tax increase that will take effect in January next year. Unemployment continues to be the great puzzle of the Chilean business cycle. There are some signs of a deterioration in the labor market, but far from what you would expect.
In the latest Monetary Policy Report, there was a detailed discussion about potential GDP growth in Chile. According to the Central Bank, potential growth is now close to 3%, and the output gap is somewhere between 0.1% and -1.1%.
In August, the 12-month variation of the CPI reached 5%. There are still non-negligible inflationary pressures in the short term coming from the devaluation of the peso. The inflation surprise was generalized, and as a consequence, inflation forecasts have been on the rise.
On the political front, a recent public opinion poll in Chile shows that President Michelle Bachelet is not only at historically low levels of popularity, but so are all government and political institutions. Although the president intuitively knows that the road back lies in strengthening institutions, the key to those reforms is held firmly in Congress, where the proposals of the so-called “Engel Commission” are being watered down. This places the government in the uncomfortable position of having mandated and accepted the Commission’s recommendations for greater transparency and accountability, but being limited in its ability to see these reforms through. The result is likely to be even greater public distrust of politics and those who practice it.
We also comment on the recent controversial resignation of the Chairman of the Board of the state-owned commercial bank, Banco Estado, and its implications.
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