Hibernation: A state of inactivity and metabolic depression

CHILE - Report 06 May 2016 by Igal Magendzo and Robert Funk

Data concerning sectorial activity reveal an economy that continues to grow at very low rates.
Nominal retail sales growth went down. The index, beyond the fluctuation in February, has been flat during the year. Decomposing the index, it becomes evident that even though sales of non-durable goods have been flat, sales of durable goods are sustaining a recovery. The 12-month variation of manufacturing production was positive for a second consecutive month, which signals stability.
The nation-wide unemployment level has risen, but remains at moderate levels. These figures are in line with the tendency that the labor market has been showing. Consistent with this, the rate of growth of employment fell. Also the performance displayed by wages in February is in line with the deterioration of the labor market.
The Chilean government has proposed a new labor law that gives unions exclusive bargaining rights, and that benefits won in negotiation apply only to union members. This has been rejected by the country’s Constitutional Tribunal, raising questions, on the one hand, regarding the future of Michelle Bachelet’s labor reform, and on the other, about the judicialization of politics and the political orientation of a court designed to rule on issues of constitutionality.
There are indications that seem to suggest that inflation is beginning to give in, prompted by the behavior of salaries, the exchange rate, inflation of imported goods, plus lower economic activity. The 12-month variation of underlying CPI measures fell compared to last month’s variation. This in contrast to inflation in prices of services, which has remained relatively stable. This most likely illustrates the first signs that inflation could continue to fall in the next couple of months.
In the last Monetary Policy Meeting, the Central Bank kept the short interest rate (MPR) at 3.5% but changed its bias by transitioning from a relatively hawkish stance to a more neutral one. The Monetary Policy Meeting minutes reveal that the discussion inside the Board has become less controversial in terms of diagnosis. The Board member’s inclinations are still the same, but the balance has shifted towards a more dovish stance.

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