A long way down

CHILE - Report 01 Aug 2023 by Igal Magendzo and Robert Funk

Economic activity continued to adjust in May. Manufacturing production saw a partial rebound, while consumption continues to adjust in line with income levels, and diminishing excess real household liquidity. May’s figures show that commerce stagnated, and annual contractions deepened. The high current account deficit continues to shrink, reducing macroeconomic vulnerability.

Unfavorable labor market data paused in the March-May rolling quarter. The monthly variation of the seasonally-adjusted series reached its best result since the December 2022-February 2023 rolling quarter. The composition of job creation contributed to the positive number. The unemployment rate, surprisingly, fell. In May, the trend in wages continued to be relatively positive.

Inflation continued its decline, with the June CPI providing solid evidence of the consolidation of the process. June inflation surprised significantly on the downside, falling below both the lowest analyst forecasts and the Central Bank's estimate in its last Monetary Policy Report. In June, the decline in inflation was not limited to volatile products, but could be seen in the vast majority of CPI divisions.

In its June IPOM, the Central Bank moved forward the base scenario for the start of the cutting cycle. The center of the corridor for the Monetary Policy Rate (TPM) indicates an initial drop of 50bp in July and a projected TPM of 8.25% by the end of the year. The June Monetary Policy Meeting stood out for a split vote within the Board, and a clear bias towards imminent cuts. In July the Central Bank surprised the market by cutting the TPM by 100bp. As a result of this bold move, we expect a steepening of the nominal rate curves, particularly in the short- and medium-term segments.

The right-wing majority in the Constitutional Council is making itself heard. Its proposed amendments to the Committee of Experts' draft appears to be doubling down on positions that would maintain or even reinforce today's conservative constitutional order. Among these proposals are ensuring the maintenance of a private health care and pension system, and freeing prisoners above the age of 75, which would mostly affect those convicted of the dictatorship's human rights abuses. The latest polls show that Chileans are more concerned with order and security than with rights. But is the right overplaying its hand?

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