Bachelet peocupaciones sum in the second part of its mandate

Editor's note: Chile is not remembered inflationary levels for 12 years. Almost three times the central bank target. Its growth is low. This reality has not escaped the world today. Bachelet has announced new measures, like their international counterparts, to try to reverse this dynamic. I can send your comments to: paola@moneyweekes.com

Sum Bachelet Concerns in the Second Part of its mandate

Buenos Aires, Argentina

March 6, 2008

More inflation, slower growth and energy problems. What else can happen to Michelle Bachelet at the beginning of this year?

Inflation in Chile reaches a level of 8.1% year to February, is not a minor fact. Long memories may recall just such a high level of inflation in Chile: the last time you saw an inflation rate above 8.1% was in June 1996. This is too much for a central bank with an inflation target of 3% (and with a tolerance of 1%).

But higher inflation is not the only problem facing Chile. The brothers Chileans are concerned how the level of activity slows. In a statement issued by the Central Bank: "According to preliminary information, the Imacec January increased 3.4% over the same month last year." This value is lower than expected and this has influenced the fall in the value added of electricity generation and mining.

So far, the estimated levels (or expected) by the Central Bank of Chile are far from the observed values: the monetary authority estimates a GDP growth for 2008 in a range from 4.5% to 5.5% while its inflation target is located at 3% ... Will we have to sharpen the pencil?

More inflation and less growth. What will the Central Bank of Chile at the next meeting? The dilemma is more complex than it seems at first sight because of this decision must also be considered where the Fed moves, because higher interest rate differentials with the Fed, can hinder the competitiveness of the Chilean economy through increased exchange rate appreciation.

The uncertainty about what will make the Central Bank is reflected in the market. For Bci Investment firm: "Despite the weak growth, inflation figures lead us to believe that the Central Bank 25 basis points increase in its rate request on 13 March," while for the Group Chief Economist Security, Aldo Motto: "The inflation data are primarily determined by the rise in electric bills ... but this is going to normalize in the coming months", which Central Bank expected to keep rates unchanged.

For now, the signals of the monetary authority in the minutes of the last meeting are not auspicious: "The Board believes that although the future path of the TPM (policy rate) will depend on the new information to accumulate and its implications on projected inflation, can not be ruled again be necessary to adjust the monetary policy so as to ensure convergence of inflation to the target. Of particular importance for this will be the development of the international scene, the persistence of recent exchange rate appreciation and the eventual spread of last year's inflationary shocks to other prices?.

Something else to worry? Yes ... The dollar reached its lowest level in Chile in the last 10 years in relation to the Chilean currency. Closed yesterday at $ 448.5. While the appreciation of the nominal exchange rate has accelerated in recent times, the real exchange rate has been at a higher rate due to the acceleration of inflation.

The appreciation of real exchange rate, competitiveness by removing the Chilean economy may exacerbate the impact on economic growth whereas exports of industrial products account for 12% of Chilean GDP, while agricultural and fishery products by 2% from the same .

Could be worse the situation? Yes, because Chile is affected by a drought that hit both industry and agriculture as it is impacting on the electricity generation capacity in the country. On top you can not count on Argentine gas supply ...

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With this panorama, Bachelet certainly have thought that something had to be done and he announced a series of economic measures to counter these problems (which must be approved by Congress). There are five steps (half of those taken in Mexico), which provide rebates on gasoline, elimination of the Stamp Tax (ITE) to SMEs, promoting the development of biofuels, the purchase of hybrid vehicles and benefits construction. Will that be enough?

So far, the measures have a positive effect on inflation through the drop in fuel tax. The reduction in inflation would be 0.4 percentage points according to Finance Minister Andres Velasco. We must also recognize that the elimination of stamp tax, benefits mainly to SMEs, enabling them to reduce expenses and increase their capacity to negotiate loans and interest rates in banks. Is that enough?

At least, all sectors agree that the measures are in the right direction, although most are considered late and insufficient.

And while industry and agriculture face a gray landscape, the mining sector, with copper at the head, keeps its momentum thanks to the growing trend in international prices. This good time mining is also reflected in the annual report of Metals Economic Group shows that Chile again ranked among the top ten countries where more is spent on mineral exploration in 2007 where $ 360 million earmarked to find mineral reserves (representing 4% of total resources spent on global exploration).

We will meet again tomorrow,

Horacio Pozzo