Inflation in Chile will continue to moderate in 2023, although it will remain high: OECD

Inflation in Chile will only return towards the Central Bank‘s 3% target in 2024, according to the Organization for Economic Cooperation and Development (OECD).

In its Economic Perspectives report for November and published this Tuesday, the international organization said that consumer prices recently began to decline and will continue to moderate throughout 2023, as the effects of the tightening of monetary policy become visible on growth and inflation.

“Inflation will remain elevated throughout 2023, due to the lingering effects of high energy prices, but the projected economic downturn and high interest rates will help bring it back on target.”

The OECD assures that the increase in energy and food prices and demand pressures have pushed inflation to historical levels, reaching 12.8% in October, with medium-term inflation expectations close to the upper limit of the central bank tolerance range of 2-4%. This, according to the agency, suggests “a risk of disembedding.”

Its recommendation is that monetary conditions should remain “tight” to ensure that inflation returns to target.

According to the Paris-based organization, adherence to the fiscal rule will allow moderate deficits in 2023 and 2024, after a surplus in 2022 due to strong revenue collection and the withdrawal of spending due to the Covid-19 pandemic.

CONTRACTION OF 0.5% IN CHILE BY 2023

The OECD updated its growth projections for Chile. Now, it estimates that the economy will slow to 1.9% this year, and there will be a contraction of the Gross Domestic Product (GDP) of 0.5% by 2023. It also anticipates a growth of 2.6% in 2024.

This projection is the same as the one presented in a study by the agency in September in Santiago. However, this is an adjustment from its previous Economic Outlook report, published in June, which forecast growth to slow “sharply” to around 1.4% in 2022 and 0.1% in 2023.

According to the international organization, the strictest financial conditions, the withdrawal of support measures related to the pandemic and the erosion effect of inflation on purchasing power will reduce household consumption.

“Higher interest rates and low business confidence will keep investment subdued,” says the note on Chile in the report.

The OECD aims to reduce barriers to competition and increase investment in research and development to stimulate productivity. “The planned tax reform would make the tax system more progressive and raise additional revenue to strengthen social programs and public investment,” it explains.

With information from Bloomberg Línea