Both the Central Bank of Chile (BCCh) and the Government seem really determined to drastically lower inflation in 2023 and market analysts believe that the Consumer Price Index (CPI) will finally drop, although they doubt that it will be achieved in 2023 reach the goal set by the monetary authority (3% per year).
With data as of November 2022, Chile’s CPI currently stands at 13.3% year-on-year, after reaching a 30-year high in August (14.1%).
The downside is that the efforts being made to slow down prices are bound to have a negative impact on economic activity.
The projections of the Economic Commission for Latin America and the Caribbean (ECLAC), along with other organizations, suggest that Chile will be the only country in the entire region to show negative growth in 2023.
The BCCh itself acknowledges in its latest Monetary Policy Report: “Inflationary convergence continues to rest on the fact that the economy will continue to adjust. In the central scenario, it is still projected that activity will have several quarters of contraction.”
The entity expects the Chilean Gross Domestic Product (GDP) to fall between 0.75% and 1.75% in 2023.
WHAT CAN HAPPEN WITH INFLATION IN 2023
“I think inflation will drop significantly in 2023, ending the year at around 5%,” projected Joseph Ramos, an academic at the University of Chile’s Faculty of Economics and Business.
Ramos justified this estimate in that, on the one hand, Ukraine will not continue raising energy and food prices even more and, on the other, that domestic spending will slow down and put pressure on prices due to the high interest rate.
Regarding the latter, the Central Bank of Chile highlights in the Monetary Policy Report that it will maintain the rate at 11.25% “until the state of the macroeconomy indicates that said process has been consolidated,” in relation to the convergence of the inflation to the desired limits.
For his part, Javier Mella, an academic from the Faculty of Engineering and Applied Sciences of the Universidad de los Andes, stated: “Annual inflation by the end of 2023 is expected to be above the target range of the Central Bank. In particular today, I would expect 4.5-6%, but with a lot of uncertainty.”
Mella added: “All in all, we must remember some changes in the economic agents, such as the proliferation of leases in UF, which makes it difficult to rapidly converge to the target range.”
The person who also did not consider it entirely probable that the BCCh would achieve its goal was Ricardo Bustamante, head of trading studies at Capitaria.
“It is very likely that we will maintain high inflation during 2023, since, although the expectations are that it will drop compared to the current year, it would continue to be high compared to the Central Bank’s goal,” he said.
In line with these views provided by experts, the BCCh itself admitted in a recent statement that “inflation continues to be very high and convergence to the 3% target is still subject to risks.”
RISKS FOR ECONOMIC ACTIVITY
Bustamante stressed that expectations for economic activity are “increasingly weaker”, with projections that have been continually updated downwards. And he explained: “As high rates are maintained, there is a greater incentive to save and a disincentive to consumption and investment, hitting trade more.”
Mella highlighted that the fact of having a restrictive monetary policy rate, with public spending expanding moderately, “the effects are being seen in activity.”
But he clarified: “It is a bad-tasting pill, but necessary to heal the imbalances in the economy. I would expect that there will be no need to raise rates any time soon, but still, today it is less likely that we will see a rapid decline in the policy rate in early 2023.”
Finally, Joseph Ramos stated: “It is likely that the reduction in spending will not only have an impact on lower inflation, but also on something in lower production, of the order of 1%.”
With information from Bloomberg Línea