Bye-bye, cyclical recovery.

CHILE - Report 30 Oct 2018 by Igal Magendzo and Robert Funk

The Central Bank has raised the Monetary Policy Rate (TPM) to 2.75%, after keeping it at 2.5% for 17 months. The Bank will likely raise the TPM another 25 bp in the next RPM in December. More importantly, the Bank says that, under the base scenario, it will bring the TPM to at least 4% by 2020.

Three messages in the communiqué stand out. First, the Bank is looking at a new core inflation measure. Second, it believes the labor market is more robust than National Institute of Statistics (INE) figures show. Third, there was no mention of the strong increase in onshore U.S. dollar interest rates. The Bank doesn’t seem to care, as long as the FX market continues to flow.

Economic slowdown is already here, which should not be surprising. After a year of growing at nearly 5%, the output gap should be close to zero. This means cyclical recovery is over. Growing 4% in 2018 is coherent with an annualized q/q seasonally adjusted rate of 3% in Q4. Both retail sales and manufacturing production in August reverted the (strange) slump of July. Business confidence recovered slightly in September.

Export values fell 7% in the 12 months to September, the largest fall since July 2016. This plunge was led by a 13% contraction in mining exports, mostly driven by the fall in copper prices. Industrial product exports have been doing fairly well, expanding 12.4% y/y in Q3.

INE’s unemployment rate reached 7.3% in the June-August moving quarter, the highest for this period since 2011. A positive aspect was the persistence of the shift from public to private employment.

In September, the 12-month variation of CPI resumed its upward trend. Inflation reached 3.1% y/y, above the Central Bank's target of 3% for the first time since September 2016.

President Sebastián Piñera announced his plan to reform Chile’s pension system. It addresses some urgent matters, but leaves Chile fully committed to its private, although increasingly mixed, pension system. For now, the proposal has been well received.

Jair Bolsonaro's victory in Brazil raises the obvious question: Is Latin America ripe for right-wing populist contagion? Is Chile? While at first glance it's clear that Bolsonaro’s rise is the result of very specific Brazilian circumstances, a closer look shows that Chile is not immune from the political climate that brought Bolsonaro to power.

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