In the Waiting Room
Executive Summary
All signs point in the same depressing direction – or, one might argue, in no direction at all. Business confidence is stagnant, at historically low levels. The manufacturing sector is suffering from bradycardia (a condition of slow heartbeat). For the second month in a row, retail sales delivered a negative monthly number.
Inflation expectations are in freefall, with both economic slowdown and the fall in commodity prices contributing to that trend. We expect inflation to continue to steadily fall, though it should stay above the 2%-4% Central Bank tolerance range at least until February. Core measures of inflation, though, rose slightly in November.
Three recent government announcements have helped slow inflation. The first was that the Mepco, which affects gas and diesel prices at the pump, would be realigned. Second, the price of natural gas supplies to households is to be cut. Third, water prices to households are to remain stable for the next two years.
Financial conditions are growing ever more expansionary. Interest rates, especially long term rates, refuse to revert, while the currency continues to depreciate. Sometimes it seems only the sky is the limit.
In its December monetary policy meeting, the Central Bank decided to keep its reference interest rate unchanged, at 3%. Its communiqué was almost a cut-and-paste of its previous one. Yet two things about it were disturbing. First, there was no mention of the expectation that inflation would almost surely fall in 2015. Second, as usual, the communiqué says that inflation expectations are well anchored. But forward prices may show otherwise.
Findings published by the most reliable polling organization, Centro de Estudios Públicos, in November indicate that Michelle Bachelet has gone from being one of the most popular presidents in Chilean history to being as unpopular as her predecessor Sebastián Piñera; only 38% said they approve of the job she is doing. Any president with an ambitious reform agenda is bound to encounter some opposition. Yet the Bachelet case seems extreme. Her reforms seem to be addressing the wrong issues.
Her education initiative is a good example of what has gone wrong. Much in Chile’s education needs fixing. But, strangely, the Bachelet administration has begun with charter school reform, rather than trying to improve the public primary and secondary systems used by the vast majority of Chileans.
One gets the sense that the government has inadequately analyzed the reasons for public protests. This explains not only the plummet in the president’s popularity, but also in public support for her reform agenda.
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