Chile’s finance minister played down the impact of one of the world’s worst currency routs on inflation, saying the short-term peso weakness is unlikely to divert the central bank’s plans to cut interest rates.
(Bloomberg) — Chile’s finance minister played down the impact of one of the world’s worst currency routs on inflation, saying the short-term peso weakness is unlikely to divert the central bank’s plans to cut interest rates.
The currency slump stems from global economic factors such as the appreciation of the dollar as the Federal Reserve turns more hawkish, meaning any pressure on domestic prices will be relatively small, Mario Marcel said in an interview from the International Monetary Fund’s annual meeting in Morocco.
“The central bank manages monetary policy on the basis of a medium-term horizon,” said Marcel, who previously ran Chile’s central bank and the government’s budget office. Short-term movements in domestic prices due to factors like the exchange rate and oil prices “are not particularly relevant for decisions of monetary policy.”
The peso hit a fresh year-to-date low on Thursday after dropping nearly 14% over the past three months, the biggest decline among expanded major currencies after Argentina. Some economists expect the depreciation to hit inflation in the last part of the year through the cost of imports, potentially slowing the pace of rate cuts.
Given the source of currency pressure is international and not local, pass-through to domestic inflation tends to be weaker, Marcel said.
“There may be some noise, there may be some speculation,” he said. “But in the end it is pretty clear what is putting pressure on the exchange rate.”
Annual inflation stands at 5.1%, well below the three-decade high of 14.1% recorded last year. The consumer price slowdown paved the way for the central bank to start a monetary easing cycle, reducing rates by 175 basis points in the last two meetings, while signaling more reductions will come.
New Constitution
Marcel is steering one of Latin America’s richest nations through a rough patch. The economy has been hit by slumping consumer demand, rising unemployment, and more recently, renewed uncertainty over a constitutional rewrite.
Earlier this month, the government cut its 2023 economic growth forecast to zero while keeping its estimate for 2024 steady at 2.5%. That’s still more optimistic than analysts surveyed by the central bank who expect gross domestic product to shrink 0.4% this year.
Work is advancing on the second attempt to rewrite the constitution in two years, with the latest proposal slated for a national referendum on Dec. 17. Polls show the draft will again be rejected, leading some analysts to warn of a prolonged period of doubt over the nation’s basic laws.
Marcel, who is President Gabriel Boric’s main representative before international investors, said the December vote will end the four-year push for a new charter.
“There are no provisions and no agreements and I believe no appetite to continue that process if this second proposal is rejected,” Marcel said. “So one way or another, the constitutional process as we have known it so far, is ending by December 17 this year.”
Chile is also facing challenges at state-owned copper producer Codelco, which is mired in high debt, falling production and recent turn-over among top management. In a Bloomberg News interview on Oct. 11, Mining Minister Aurora Williams said it’s up to the company board to resolve the firm’s own problems.
Marcel said Codelco’s fortunes will turn around given that the government previously agreed to allow it to reinvest 30% of its profits and production now is growing again in the second half of the year.
“With the production going up with the ability to reinvest profits, the situation should improve gradually over time,” he said.
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