From Pennsylvania, in the United States, Moody’s Analytics director for Latin America, Alfredo Coutiño, has closely followed events in the Chilean economy in recent years.
“It is not certain that the worst of the adjustment has already passed, because if inflation resists falling, or even rises again in the face of an acceleration of the economy, then it will force the central issuer to resume the rise of the TPM (Policy Rate Monetary)”, affirms the economist.
In a written interview with Pulso, Coutiño fully enters into the analysis of the panorama exposed by the Central Bank for the Chilean economy in its recent Monetary Policy Report (Ipom). The monetary agency raised its projection for this year’s Gross Domestic Product (GDP) from the range of -1.75 and -0.75 to one between -0.5% and 0.5%. For inflation, in turn, it went from 3.6% to 4.6% for the annual closing of 2023.
The Central Bank in its Ipom assumes a more benign scenario in terms of growth for 2023, but alerts for inflation that does not subside so quickly. Do you share the panorama presented by the BC?
-Inflation is indeed showing greater resistance, which suggests that the reduction will be slower than anticipated, but it also sends a signal that there is no room to lower our monetary guard in the short term. In fact, we estimate that inflation will end 2023 above the 4.6% estimated by the IPOM. On the other hand, the economy is showing greater resilience, leading to a better economic outlook for 2023, which could even hamper the battle against inflation.
Finance Minister Mario Marcel has tried to raise expectations. He has said that the worst of the adjustment is over and that inflation will begin to ease to single-digit rates in 12 months in the second quarter. How do you view these statements in relation to what was stated by the BC? Do you see contradiction?
-As the inflationary trend is going as of March, it is very possible that headline inflation falls to single digits no later than May. But despite the downward trend, the inflationary reduction will only be enough to bring the annual rate to end the year even above 5%. But this inflationary reduction scenario is subject to the fact that the inflationary restriction is maintained and that there are no additional price shocks. I do not see a contradiction between the vision of the Treasury and the monetary vision regarding inflation. However, it is not certain that the worst of the adjustment has already passed, because if inflation resists falling or even rises again in the face of an acceleration of the economy, then it will force the BC to resume raising the TPM.
Why won’t inflation drop as expected? Will that mean delaying an interest rate cut?
-One factor behind the inflationary resistance is that the abatement of excess domestic demand has been slower than anticipated, which continues to generate pressure on consumer prices. Another possible factor is that the level of monetary restriction is not sufficient to reduce demand pressures, so either it is necessary to increase the restriction or maintain it for a longer period of time. The rate cut is not urgent and it seems that it is more a good desire of the market and not a hurry from the monetary authorities.
Although the Central Bank improved GDP growth prospects for this year, it lowered them by one point for 2024. How do you assess it?
-The upward adjustment of growth in 2023 is in line with what was shown by the economy at the beginning of the year, which on the one hand shows a better capacity for economic recovery, but on the other it may be indicating that the degree of monetary restriction is it is coming up short to halt the advance of the economy in 2023. The downward adjustment in growth for 2024 indicates that the Central Bank is in no hurry to start cutting the MPR, but to maintain it in such a way that the prolongation of the restriction has time to induce a moderation of the advance of the economy still in 2024; this, in order to prevent it from running wild again and generating external and internal imbalance.
Worried that investment remains weak? Could the current government complete four years of poor GDP growth?
-The weakness shown by investment is a concern, because this variable is what determines the potential capacity of the economy in the medium and long term. What is not invested in 2023 and 2024 will limit productive capacity in the second half of the decade, since that would restrict the accumulation of both physical and human capital in Chile. If the investment to product ratio stagnates or decreases, Chile’s economic future will be limited, which would send the country into a four-year period of insufficient growth to raise the welfare of Chileans.
How will the discussion for a new Constitution and the tax and pension reforms continue to influence the economy?
-These are issues that, if not resolved positively, will continue to limit the possibilities of accelerating economic progress in the country. Chile needs a new Magna Carta that responds to the new internal challenges, but it also needs reforms that free the economy and its institutions from the bottlenecks and lags accumulated in the past.
What are the main risks for the Chilean economy in the coming years?
-Internally, that the country becomes a hostage to inaction and political paralysis and that the lack of political agreements leads to greater social instability. Economically, the greatest risk comes from outside, in terms of the possibility of a new global recession, as well as the appearance of new geopolitical risks.