The June report highlights economic stability and forecasts inflation closing at 4.2% by 2024, adjusted for the rise in copper and electricity rates.
The Central Bank of Chile published the Monetary Policy Report (IPoM) for June 2024, a document that highlights that the local economy has evolved in line with what was projected in the March report and that activity has been returning to a coherent growth path with its trend, with demand performance somewhat better than expected.
The IPoM highlights that, as anticipated in March and as confirmed by the data from the Monthly Index of Economic Activity (Imacec) for March and April, part of the greatest growth at the beginning of the year came from supply factors that have been reversing .
Meanwhile, it stands out that the annual variation in inflation is around 3.5% – linked reference series – and that two-year expectations remain at 3%.
Externally, developments continue to be dominated by the adjustment of expectations for monetary policy in the United States; global growth projections have minor adjustments, although it should be kept in mind that several economies have performed somewhat better than expected.
The Report highlights that one of the important news in recent months has been the rise in the price of copper, which responds to transitory and other persistent factors. The projection scenario considers a higher metal price than estimated in March. Thus, the assumption is used that the price of copper will average US$4.3 per pound between 2024 and 2026 (US$3.85 in March). This would positively impact investment, agents' expectations and the current account balance.
At the local level, the report highlights that bank placement interest rates have decreased in line with the transmission of the reduction in the MPR, with credit showing limited performance. The latter occurs in the midst of a demand for credit that has continued to weaken and supply conditions that do not show changes in the margin, although they continue to be restrictive in some portfolios. All in all, he adds, the behavior of commercial credit has been consistent with its fundamentals, although it shows a certain slowdown that must be monitored.
Likewise, the Report highlights that the lower depth of the national capital market, as a result of the withdrawals of materialized pension savings, continues to affect the economy, mainly due to its impact on the availability of longer-term local financing.
Projections
The Report highlights that the macroeconomic scenario has evolved as expected, although with internal demand that grew somewhat more than expected in the first quarter. Likewise, the local economy has gradually returned to a growth path consistent with its trend and inflation has continued to decline, with two-year inflation expectations remaining at 3%.
The new developments in the central projection scenario with respect to March are the best starting point for domestic demand, which will be supported by the higher price of copper and the readjustment of electricity rates, which strongly impacts inflation in the one year term.
The report's projections expect that local inflation will have a significant increase during 2025 and that its convergence to the 3% goal will occur in 2026. This is mainly influenced by the impact of the supply shock associated with the Electricity Rate Stabilization Law . The central projection scenario shows that this phenomenon would increase the projected inflation by June 2025 by 1.45 percentage points.
Considering all the changes in the projection scenario, this Report estimates that annual inflation would close 2024 at 4.2% (3.8% in March) and in 2025 at 3.6% (3% in March), with an average inflation which would be 1.1 percentage points higher during that year.
At the activity level, the report predicts that activity would grow between 2.25% and 3% this year (between 2 and 3% was projected in March). It should be remembered that as the year progresses, the width of the growth projection range reduces by 25 basis points.
The Report indicates that the adjustment of the projection for 2024 is related to better effective data on the spending side and the initial scope of the rise in the price of copper. In the medium term, the effects of this last element are offset by the negative impact that adjustments in electricity rates have on household disposable income. This affects the maintenance of the growth range between 1.5% and 2.5% for 2025 and 2026.
Monetary politics
According to the Report, the Council estimates that, if the assumptions of the central scenario materialize, the MPR would have already accumulated the bulk of the cuts planned for this year during the first half of the year. It is mentioned that the central scenario of the June Report considers that the MPR will continue to reduce during the monetary policy horizon, at a pace that will take into account the evolution of the macroeconomic scenario and its implications for the trajectory of inflation.
The report also indicates that there are scenarios where monetary policy could follow a different path than the central scenario, which are reflected in the MPR corridor. Thus, the upper limit could occur in a scenario in which the increase in inflation shows greater persistence than expected. This could occur if demand shows a greater boost than anticipated, or alternatively, if the electricity rate shock has more permanent effects on inflation.
The lower limit, which assumes lower inflationary pressures, could occur if the impulse of the increase in the price of copper on domestic demand was more moderate or if the contractionary effects of the aforementioned tariff adjustment on consumption were greater.
The Report highlights that the Council will ensure compliance with the inflation target, evaluating, on the one hand, that the spread of the shock is as expected and that inflationary persistence does not increase. On the other hand, monetary policy should adequately support the economy when it has entered a process in which its growth is gradually approaching levels consistent with its trend and the labor market improves.
