Santiago — The strengthening of the US dollar is darkening inflation projections in Chile, and according to analysts consulted by Bloomberg Línea, consumer prices will rise further in the coming months, driven by the rise in the exchange rate to levels that were not anticipated in recent weeks.
The economic scenario has changed radically in recent weeks, according to Felipe Ruiz, senior economist at BCI. His explanation is that the prospect of a global economic recession for the coming quarters has become real in a context of high inflation and high interest rates.
Commodity prices have fallen sharply and currencies have depreciated sharply against the dollar. In Chile, the exchange rate has reached historic highs and with an unprecedented rate of depreciation of the peso.
Accordingly, BCI Estudios has revised upwards its short- and medium-term inflation projection. For the end of the year, it has raised its inflation projection from 10% to 11.1%, taking into account the increase in the peso-dollar exchange rate, increases in food prices and hikes in electricity rates, among other factors.
The consumer price index data for the month of June will be released this Friday and, in general, the outlook is that it will rise between 0.9% and 1.1% per month.
Itaú adjusted its projection for last month’s inflation upwards, from 0.6% to 1.1%. But these adjustments do not incorporate the impact of the recent peso depreciation.
“There is still a lot of inertia in the inflationary shock, evidenced by the fact that we have had similar revisions in several previous months, and it is very likely that the depreciation will accentuate inflationary pressure in the coming months,” said Andrés Pérez, chief economist at Itaú.
And according to Marco Correa, chief economist of BICE Inversiones, the recent impact of the rise in the dollar should be reflected in the coming months, since the products traded in June were acquired earlier, and correspond to inventory liquidation. “Thus, we project a variation of 0.9% in June, and 12.5% in a 12-month variation. For the year, we did adjust for this effect, going from 9.8% to 10.2%”.
Chile’s imports represent almost 30% of GDP, and the strengthening of the dollar will have an impact on the prices of imported products. BCI Estudios anticipates that the June CPI could register a variation of around 1.1% month on month, and for the time being considers that the figure will be close to 1% month-on-month for July and August.
Pablo Cruz, chief economist at BTG Pactual, adds that, although there are some items that are directly affected by the price of the dollar in the month, such as airline tickets or tourist packages, he expects most of the effect to occur in the coming months.
“At the moment, we are expecting inflation of 1.2% for June (12.7% YoY) and for the year to end with inflation closer to 12.5% YoY in December, up from a previous 11.5% a couple of weeks ago.”
What will happen with interest rates?
Amid the complex Chilean and global scenario, the Central Bank will decide on the movement in the monetary policy rate (MPR) next Wednesday.
BCI Estudios anticipates an increase of 50 basis points, placing the MPR at 9.5% and closing the process of interest rate increases that began last year.
“If the argument is dominated by concern about the global recession, it reaffirms the possibility that no further interest rate increases will be necessary, given that the deceleration of economic activity will adjust inflation downwards,” BCI’s Ruiz said.
Otherwise, if concerns about inflationary inertia predominate, together with the short-term effects of the rise in the exchange rate, the Central Bank could continue to raise the interest rate in the coming months, he added.
“For now, we are leaning towards the first option, but the immediate risks to the Chilean economy have been rising.”
BTG Pactual and BICE Inversiones also expect a 50-basis-point hike at the monetary policy meeting.
Cruz notes that while some of the peso’s depreciation may be idiosyncratic, the bulk of it is associated with heightened fears of a global recession, coupled with a drop in the price of copper.
“While this may be inflationary in the short term, via depreciation and higher indexation, the worse external outlook should contract aggregate demand in the medium term, helping to contain inflationary pressures. On the other hand, the MPR is already at highly contractionary levels. However, we recognize that risks are skewed toward higher rates,” he said.
Translated from the Spanish by Adam Critchley