You say you'll change the constitution. Well, you know.
Arguing that the current constitution is illegitimate, President Michelle Bachelet has outlined the process and timeline for drafting a new one. It will consist of several stages, including public consultation and a congressional decision on an approval mechanism.
While the president’s insistence on following an institutional path is good news, the plan seems rather thin on details. Moreover, each step opens the door for political conflict and discussion. Indeed, it is likely that the constitutional process will last far into the next government. Finally, the present administration’s refusal to hint at what its own vision for a future document might be, combined with the vagueness of the process announced, does little to reduce market and public uncertainty.
The Central Bank did as promised. In the October Monetary Policy Meeting all Board members voted in favor of a 25bp increase in the Monetary Policy Rate. In the communique, the Central Bank committed to further increases of the MPR. The minutes reaffirm that there will be at least one additional increase of 25bp in the coming months.
Economic activity continues to be sluggish, with no sign of recovery. Expectations today are that in 2016 the economy will grow close to 2%. According to the Monthly Index of Economic Activity (Imacec), the Chilean economy had its lowest monthly variation since November 2010 (excluding March 2010 when the Imacec fell 3.5% as a consequence of a massive earthquake).
The Monthly Index of Business Confidence experienced a recovery in September, but it is still low by historical standards. In September the 12-month variation of retail sales was higher than in August, but this apparent recovery is due to base effects. Home sales continue to enjoy a pre-tax-increase honeymoon. This explosion in sales is partly driven by the psychological effect of a tax change that takes effect next January.
According to the quarterly employment data for Santiago, prepared by the Universidad de Chile, unemployment lifted off in the third quarter of this year. Nevertheless, an important part of the increase in the unemployment rate was due to an unprecedented increase in the labor force within the capital city. According to the National Institute of Statistics, unemployment in Santiago went down in the moving-quarter ending in September. At the national level, unemployment is still low; the public sector is playing a major role in keeping unemployment from rising.
In September, inflation surprised markets on the downside, for a change. Even though inflation returned to below the 5% mark, and most of the measures of core inflation receded, the nature of the surprise requires us to be more cautious. Even though we expect inflation to fall in the next year or so, possibly even below the Central Bank’s 3% target, in the current situation short-term dynamics are particularly hard to predict.
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