OF
CENTRAL BANK CHILE ANNUAL REPORT PRESENTATION
BEFORE THE OF THE
HONORABLE SENATE REPUBLIC*
Mario Marcel
Governor
Central Bank of Chile
01 September 2021
I. Introduction
Madam President of the Senate, Senator Ximena Rincón, Honorable Senators, ladies, and gentlemen,
On behalf of the Board of the Central Bank of Chile (CBC), I thank you for your invitation to present the report
that, in accordance with the Constitutional Organic Law of the CBC, we must deliver annually to the Senate.
In compliance with this obligation, the following presentation includes our vision of the recent
macroeconomic and financial events of the Chilean and international economy, as well as their perspectives
and implications for the conduct of monetary policy, as depicted in the Monetary Policy Report (MP Report)
of September 2021. Next, we will present some advances in improving regional economic information and
conclude with a review of the achievements and challenges of macroeconomic policy in the face of the crisis
caused by the Covid-19 pandemic.
The September MP Report document also contains a more detailed review of the CBC's balance sheet, an
account of the economic projections of last year's reports, an overview of the main decisions adopted by the
Board so far in 2021 and information on the administration of international reserves. These issues we will only
partially cover in this presentation in view of time constraints.
II. The September 2021 Monetary Policy Report
In the MP Report that we present today, we note that the Chilean economy has experienced a rapid recovery
from the recession caused by Covid-19, a recovery that has far exceeded expectations. The data for the second
quarter and the IMACEC that we learned this morning confirm that activity has recovered and even exceeded
its level prior to the social outbreak and the pandemic with unprecedented speed compared to previous
recessions.
This recovery has been made possible by the adaptability of companies and individuals and the progress of
the vaccination plan, which has allowed to give way to an important process of opening of businesses. All this
has been underpinned by the largest deployment of policy measures ever known in Chile in the face of an
exogenous shock, as well as by an international environment marked by the simultaneous action of
containment of the crisis, led by central banks and other authorities of the world's main economies. However,
the expansion and persistence of some of these measures, combined with a high propensity of households to
consume the resources provided in various ways, has had an impact on private spending that has exceeded
all forecasts. This, in a context in which supply has not yet fully recovered, has significantly changed our
assessment of inflationary pressures facing the economy.
Also contributing to this is the depreciation of the CLP, caused in part by the perception of a worsening of the
fundamentals of the economy as a result of the successive massive withdrawals of pension funds, and the
deterioration of the fiscal accounts. All this in an environment of high local uncertainty. In fact, interest rates,
risk premiums and the stock market show an unfavorable performance when compared to their external
similes.
The need to avoid the accumulation of macroeconomic imbalances which, among other consequences, could
lead to a more persistent rise in inflation, exceeding the 24-month target of 3%, has led the Board to alter the
monetary policy stance. Thus, at our Monetary Policy Meeting held yesterday, we decided to raise the
Monetary Policy Rate (MPR) to 1.5% and today we communicated that the convergence of inflation to the
target will require further withdrawals of the monetary impulse. Therefore, we will bring the MPR close to its
neutral range-between 3.25% and 3.75%-by the middle of the first half of 2022. Let me now turn to the
details of the macroeconomic scenario underpinning this monetary policy stance.
III. Macroeconomic scenario
Chilean activity has surpassed its levels prior to the social crisis of October 2019. In the second quarter of
2021, GDP recorded annual growth of 18.1%, a figure that combined the ability of economic agents to adapt
to the context of the pandemic, the impact of policies to support household incomes and a very low basis of
comparison. This trend was confirmed by the IMACEC of July, which recorded an annual growth of 18.1%, with
a seasonally adjusted monthly expansion rate of 1.4% (Figure 1).
Data for the second quarter and the beginning of the third are showing an increase in the dynamism of
consumption that exceeds what we anticipated in June, suggesting that the policies to support households is
having greater than expected effects. The behavior of durable consumption stands out, which recorded an
increase of 130% annually in the second quarter, standing close to 50% higher than that of the same quarter
of 2019. The available data for the third quarter also show that this dynamism has continued. In July, the retail
portion of the Trade Activity Index (source: National Statistics Institute; INE)-including car sales-increased
62% annually. The consumption of non-durable goods and services in the second quarter recorded a
somewhat more moderate growth-between 20% and 30% annually-with the latter still affected by the supply
constraints associated with the pandemic, but which, for the same reason, could respond with greater
dynamism thanks to progress in the Step-by-Step Plan (Figure 2).
In line with the greater opening of the economy, job vacancies and employment have been increasing,
although gaps persist that especially affect self-employment and women. Survey information and
administrative data show a significant recovery in formal salaried employment, albeit with differences across
sectors. Less formal categories of employment-self-employment-continue to lag behind, although the most
recent data suggest an improvement consistent with the easing of mobility restrictions (Figure 3). The opening
of the economy has also contributed to the big increase in recent months' number of vacancies. Job postings
on the internet have risen considerably, exceeding their 2019 average. At the same time, companies' hiring
possibilities have also improved, as shown by the Monthly Business Confidence Index (IMCE) and reported in
August's Business Perceptions Report (IPN). In this context, consumer expectations of the future employment
situation have also improved (Figure 4).
Contrary to other episodes of economic recovery, labor supply has been unusually tight. Data from the SENCE
Labor Observatory show that, since the end of the first quarter, the number of vacancies available on its
website has grown strongly, while the number of applications to these jobs had a decline that has not been
reversed (Figure 5). According to INE data, the labor participation rate remains below 60% of the economically
active population, which is lower than the average of the last five years, although somewhat higher than a
year ago. At the same time, the INE survey shows a significant decrease in the willingness to work longer
hours. The IPN of August reported that a significant share of the companies that have searched for workers
during 2021 have been unable to satisfactorily fill the available vacancies, and in some cases no candidates
applied. Events of this type have also been seen in other countries, suggesting that there are common
elements derived from fears of infection, disruptions in the supply of services that make it difficult to work
away from home when there are dependents, and state aid.
The recovery of investment is strongly associated with its component of Machinery and equipment (M&E),
highly concentrated in imported goods. In the second quarter, gross fixed capital formation grew by almost
25% annually, with the M&E component increasing by almost 50%. The favorable performance of projects
linked to renewable energies and the very low basis of comparison cooperated in this result, as well as the
renewal of M&E of different kinds in a context of accelerating activity. Meanwhile, the construction and other
works component posted lower growth (13% annually), with levels that persist below their pre-pandemic
ones.
The increase in spending on tradable goods-especially consumer durables and M&E-was reflected in the
increase in imports and the returning of the negative balance to the Current Account. During the second
quarter, volume imports of goods rose by about 44% annually-90% in the case of consumer goods-reflecting
the growth in spending and a low basis of comparison. In turn, volume exports fell by just over 3% in the same
period.
The strong dynamism of consumption, in a context where supply has not yet fully recovered, has put upward
pressure on inflation. Data from recent months have shown a significant increase in the price of various
products, especially in areas where demand has grown strongly, such as clothing and footwear, electronics,
home appliances and cars (Figure 6). This has occurred in a scenario where restrictions on global trade chains
imposed by the pandemic still remain. In fact, available inventories, shipping times and transportation costs
are factors that continue to affect the performance of several industries globally, Chile included.
The accumulation of massive pension savings and fiscal transfers have significantly increased liquidity. Despite
the strong dynamism shown by consumption-including a major upward surprise in recent months-financial
system data show that household liquidity is still high. Thus, at the end of July the cumulative balance in
individuals' current accounts sight savings accounts had risen by USD 23 billion (some 9% of GDP) compared
to the balance in July last year. On the other hand, the increase in funds deposited in term savings accounts
and Voluntary Pension Fund Account 2 was USD 9 billion in the same period. This suggests that spending will
remain as dynamic in the coming quarters. Actually, the liquidity injections that households received in the
second quarter of this year were the highest in the past year, and those expected for the second half of 2021-
including the extension of the Universal Family Emergency Index (Universal IFE)-far exceed what they
received all through 2020 (Figure 7).
With the extension of the Universal IFE and the implementation of the workers IFE and other programs, this
year fiscal spending will exceed projections in the June MP Report. The information from the latest Public
Finance Report and Government announcements leads us to estimate that, in nominal terms, fiscal spending
will increase by more than 35% annually during this year, with an effective deficit of more than 7% of GDP.
This increase in spending cannot be covered by the tax revenues generated by higher economic growth,
increasing the need for fiscal financing. This has led the authority to further placements of Treasury bonds
and to liquidate sovereign wealth funds.
The liquidation of long-term savings after the successive massive withdrawals of pension funds, the
deterioration of the fiscal accounts, and the uncertainty about the ability to repair it have led to an adverse
evolution of local financial variables. Therefore, the national financial market has decoupled from global
movements, a situation that has become especially evident since the beginning of the second quarter. Since
then, long-term interest rates have risen by 135 basis points (bp), sovereign risk has risen by just over 10 bp,
the stock market has fallen by about 11%, and the peso has depreciated by 10% (Figure 8). This has occurred
in a context in which, after overcoming the worst of the pandemic, the indicators that measure uncertainty
have not fallen in Chile with the same speed as in other economies and are above their levels prior to the
social outbreak (Figure 9).
In this context, the CLP has become one of the currencies that have weakened the most globally in recent
months. This contrasts visibly with the fact that episodes of higher economic growth and high copper prices
have usually been associated with an appreciation of our CLP.
IV. Projections in the central scenario
The central scenario assumes that, after growing between 10.5% and 11.5% this year, the economy will slow
down significantly, to grow between 1.5% and 2.5% in 2022 and between 1% and 2% in 2023. The expected
growth range for this year is increased in response to higher-than-expected effective data in the second
quarter and a major upward revision of the consumption trajectory. Although higher spending is also foreseen
for next year, the higher basis of comparison results in an estimated growth range for 2022 that is lower.
Towards 2023, the gradual fading out of the effects of fiscal policy and the action of monetary policy reduce
the growth range estimate for that year (Table 1). In this scenario, it is estimated that the activity gap has
already closed as a result of the greater dynamism of demand, becoming significantly positive during the
second half of the year and for a good part of 2022. By 2023, the gap will return to equilibrium (Figure 10).
The upward revision of private consumption is the main factor behind the growth correction of 2021.
Secondquarter figures showed an increase in private spending that exceeded our June estimates, so the starting point
for projections is higher. In addition, this behavior of spending, together with the marginal data, showed that
the portion that is being consumed of the available resources-permanent income, IFE and pension
withdrawals-significantly exceeded our June expectations June, so we have revisited this assumption (Figure
11). In addition, it is factored into the projection that the resources available for household consumption will
be greater, given the announced expansion of fiscal transfers, namely the extension of the Universal IFE and
workers IFE.
Towards 2022 and 2023, consistent with an economy that is leaving behind the effects of the pandemic and
where the momentum of economic policies is reduced, consumption will decelerate. The central scenario
assumes that, after reaching figures of the order of 20% average in the second half of 2021, the annual rate
of variation of private consumption will be reduced to an average of around 0.5% in the period 2022-2023. In
this result interact the very high basis of comparison, the extinction of the Universal IFE, the depletion of
liquidity accumulated by the withdrawn pension savings and the tighter financial conditions.
About investment, the central scenario foresees that, after growing close to 16% annually this year, a series
of restrictive factors will manifest themselves that will attenuate its expansion to 0.3% next year and 0.6% in
2023. In this case, to the tight comparison base of 2021 are added the slow pace new of large-scale projects
to materialize-with the exception of renewable energies-the significant rise in long-term interest rates, the
impact of the depreciation of the peso, the fall in the stock market and uncertainty that is at all-time highs. As
we show in a box in this MP Report (Box I.1), the expected behavior of investment in Chile differs from what
is expected in other economies, where the post-pandemic recovery is showing a much greater traction of this
component of domestic demand.
The central scenario assumes that fiscal policy will begin a trajectory of convergence towards spending and
deficit figures in line with the structural balance rule, as stipulated in the Public Finance Report and
recommended by the Autonomous Fiscal Council. This trajectory becomes relevant not only because of the
impacts of fiscal policy on private spending, but also because of its implications on financial market variables,
in particular the evolution of long-term interest rates and the foreign exchange rate.
The central scenario also adjusts upward its short-term inflation projections due to the strong dynamism of
consumption, the idiosyncratic depreciation of the peso, higher fuel prices at home and global and local supply
that have yet to recover former levels (Figure 12). With this, annual CPI inflation will end the year at 5.7%
(4.4% in June) and will remain above 5% during the first half of 2022. The slowdown in demand resulting from
the withdrawal of fiscal and monetary stimulus policies will help inflation to begin its convergence to the
target next year, to be below 4% by the end of 2022 and at 3% by the end of 2023. Core inflation-CPI minus
volatile prices-is also revised upwards from June, projected to stand at 4.7% by the end of this year and peak
in mid-2022, as its annual variation approaches 5.5% (Figure 13).
The idiosyncratic nature of the depreciation of the peso means a greater pass-through to inflation. In recent
months, the peso has lost value against both the dollar and multilateral baskets of currencies. Thus, comparing
the statistical closures of this MP Report and the previous one, the CLP/USD parity has increased in the order
of 8%, a figure that is only slightly lower when comparing the levels for the multilateral exchange rate. The
peso depreciation in real terms has also been significant, with the real exchange rate increasing just over 11%
so far this year.
As has already been documented before,1 the size of the average pass-through coefficient from the nominal
exchange rate to inflation is larger when the parity moves responding idiosyncratic shocks to Chile-such as
the current one-versus one related to global factors. As a reference, estimates show that a 10% increase in
the nominal exchange rate is associated, a year later, with an increase in inflation of the order of 2.5% when
it responds to an idiosyncratic shock, and 0.5% when it responds to a global shock.
The external scenario that supports this projection is not very different from June's, assuming that the world
economy continues to overcome the effects of the pandemic and that the price of copper will slowly converge
to its long-term level. On aggregate, global economic data have not shown major developments in recent
months, which is consistent with global growth projections that, although with some changes in composition,
do not show significant variations either. This does not mean that the issues surrounding the evolution of the
pandemic (i.e., infections, variants, and vaccination, among others) continue to impact on short-term figures
and, especially, on the behavior of financial markets.
Commodity prices, with a few exceptions, have declined in recent months. In fact, consistent with what we
expected in June, the copper price left behind the all-time highs of mid-May, and the average of the last ten
days is closer to USD 4.2 per pound. In our central scenario we project that this year copper will average USD
4.15 per pound, it will later fall to USD 4 in 2022 and USD 3.7 per pound in 2023 (Table 2).
V. Sensitivity scenarios
The central scenario I have just described to you is based on a set of assumptions regarding the economic
environment, the behavior of economic agents and policy orientation. On these assumptions, sensitivity
exercises can be carried out that, maintaining GDP growth around the expected ranges, require a somewhat
different monetary policy action. These scenarios form the corridor for the MPR that we present in the MP
Report and that serves as a guide to understand the future orientation of monetary policy and how the CBC
would act in the face of certain changes in the macroeconomic environment.
Externally, we see a sensitivity where the strength of the recovery and cost pressures may lead to inflation
exceeding expectations in developed economies, making it necessary to raise their interest rates sooner. Such
a scenario would lead to a worsening of financial conditions for emerging economies, including a depreciation
of their currencies, and a slowdown in global growth. In a situation like that, opposing forces operate on
activity and prices, so the reaction of the MPR will depend on which dominates. However, it cannot be ruled
out that the MPR should be placed above what is considered in the central projection scenario.
At home, there are scenarios in which the future evolution of consumption could give way to trajectories that
would take the MPR in opposite directions, but still within the limits of the MPR Corridor. On the one hand, it
is possible that the propensity to consume the resources from government transfers and withdrawals of
pension savings is even greater, which would further expand consumption. A scenario like this would require
a more contractionary monetary policy response to converge to the inflation target, placing the trajectory of
the MPR above that defined in the central scenario. On the other hand, there could also be a scenario in which
consumption is not as dynamic as expected, either because its current dynamism corresponds to anticipated
spending decisions or because environmental factors, such as a resurgence of the pandemic, lead households
to contain it. Such conditions would reduce short-term inflationary pressures, allowing for a slower pace of
monetary normalization.
The lower bound of the MPR Corridor is determined by a scenario where a reduction in uncertainty decreases
inflationary pressures. Such could be the case if uncertainty subsides regarding the continuation of massive
withdrawals of pension savings and the ability of fiscal policy to resume a credible path of convergence. This
would have an impact on financial conditions and the trajectory of consumption, giving monetary policy more
room for maneuver. This would allow for a significantly slower normalization of the monetary impulse.
The upper limit of the MPR Corridor is determined by a scenario where the start of fiscal consolidation is
delayed. Such a situation could have major effects on the economy, requiring an even stronger policy reaction
to adjust macroeconomic imbalances. In this case, higher inflationary pressures would lead to the need for a
more accelerated increase in the MPR (Figure 14).
VI. Risk scenarios
In addition to the sensitivity exercises I have just described; the MP Report analyses risk scenarios in which
changes in the economy would be more significant and where the monetary policy reaction would cross the
limits of the MPR Corridor.
As in the MP Report of June, one of the risks identified is that the evolution of public finances is unclear about
their stabilization in the long term. In that case, it would be possible to observe not only greater spending
pressures than those foreseen in the central scenario, but also amplified impacts on the financial market. In
this situation, higher inflationary pressures would lead to the need for a more accelerated increase in the
MPR, despite which inflation would fail to converge to the policy target within the two-year horizon.
Another risk scenario is one where the persistent discussion regarding the stability of pension savings ends up
significantly altering the functioning of financial markets. Initially, the withdrawal of pension savings was an
exceptional measure, a one-off event, in the midst of an economic emergency. Despite this, new withdrawals
have continued to be approved and proposed, which has had significant effects on the economy, as can be
seen from the behavior of long-term rates and the foreign exchange rate (Figure 15). It is very likely that new
withdrawals of pension savings, or even the probability of withdrawing 100%, will lead the different agents to
consider that a structural change is occurring in the savings base of the economy, which has been key to the
development of the country, the dynamics of investment and the access of the Treasury to financing at an
adequate cost. A change in this direction would cause multiple negative effects that are difficult to quantify,
but whose impact will undoubtedly be painful and very persistent.
In the immediate future, a new withdrawal will increase household liquidity and boost the already strong
dynamism of consumption, further pressuring prices and the trajectory of inflation. Added to this is the fact
that keeping this discussion open is significantly increasing borrowing costs, generating capital outflows and
a greater accumulation of funds in dollars. All phenomena that would be significantly amplified by the
approval of a new withdrawal that generates distrust of the fundamental structures that sustain the financial
market. No Central Bank has the power, the instruments, or the resources to neutralize risks of this magnitude
and restore macroeconomic balances.
VII. Monetary policy stance
The economy has already overcome the immediate impacts of the pandemic on activity, and it is necessary
that public policies adapt to prevent imbalances between production and spending from prolonging over time
and generating high costs for the country. GDP has already recovered to levels prior to the social outbreak,
reflecting the great effort of individuals and firms, which has been supported by a set of measures where
monetary policy has played a major role. However, the magnitude of demand-driven policies has led to a
much more dynamic consumption than other components of private spending.
Monetary policy will seek to avoid macroeconomic imbalances harmful to people's well-being. It is important
to be aware that inflation particularly harms low- and middle-income households, which do not have the
mechanisms to protect their purchasing power and assets that the more affluent have.
Short-term projections suggest that inflation will rise above 5% in the coming months and expectations for
longer terms have been rising. The importance of keeping inflation expectations anchored to the CBC's target
and avoiding a further deterioration that is very costly for the economy is evident. A scenario in which this did
not happen would require even more drastic responses from monetary policy. The CBC will act in accordance
with its mandate to control inflation, a task that will be less costly for the economy as long as other players
contribute to restoring the macroeconomic balances that have been lost during the pandemic.
In the central scenario, we estimate that the convergence of inflation to the target will require continuing to
withdraw the monetary impulse, so we will bring the MPR to levels around its neutral value by the middle of
the first half of 2022. From then on, the evolution of the MPR will depend on the materialization of the
sensitivity scenarios described by the MPR Corridor. The Board's view is that sensitivity scenarios associated
with higher price pressures are somewhat more likely to occur, which could lead to a MPR trajectory closer to
the upper edge of the MPR Corridor. As always, the implementation of monetary policy will be contingent on
the effects of new information on the projected dynamics for inflation.
VIII. Territorial impact of the pandemic and improvement of regional economic information
In previous presentations, both here and to the Finance Committee, I have been showing products generated
under the 2018-2022 Strategic Plan of the CBC. Thus, in the presentation of the MP Report in March, I referred
to the CBC's efforts to use greater granularity in its analyses, while in the June MP Report presentation I did
so with respect to recent evaluations of the CBC's performance in various areas, the most recent in terms of
fiscal transparency. A concrete expression of these efforts has been to advance in the generation of new data,
quantitative and qualitative, that educate us in dimensions of the economy that go beyond what has been
traditionally done by the CBC.
On this occasion I would like to present the progress we are making in the analysis of the behavior of the
economy in the territory. As we know-and you have often reminded us of this yourselves-Chile is a
heterogeneous country, with different productive vocations throughout its geography, which makes the great
economic aggregates conceal very different realities. Until now, the main statistical product that could reflect
these realities was the Regional Accounts, but these were prepared only on an annual basis and were
published with a lag of more than one year behind the National Accounts. The difficulty of having more
upto-date economic information was accentuated when the INE discontinued its Regional Activity Index
(INACER) because of its methodological weaknesses.
Based on the need to have more up-to-date disaggregate economic information, we have crossed information
between administrative registries to generate indicators of high-frequency activity at the territorial level. The
main challenge in this regard has been the distribution of information, given the tendency to concentrate their
tax domicile in the Metropolitan Region, regardless of where goods are produced or transactions are carried
out. To remedy this difficulty, the distribution of annual regional GDP has been approximated by using
information of the place of residence of workers in an economic unit. Thus, the territorial distribution that
results from allocating the sales of the firms in proportion to the location of their workers, delivers a
geographical distribution similar to that of the regional GDP. This gives rise to sales series in the territory for
the period 2019-2021, which we group into six macrozones. These series thus allow us to observe the behavior
of each of the territories in the period covered by the social crisis and the Covid-19 crisis, which is reported in
Box III.1 of the MP Report (Figure 16).2
As can be seen, although there was strong joint movement of territorial activity before the pandemic, since
then there has been a marked heterogeneity in the evolution and recovery of activity in the different
geographical areas. Thus, the best performance of the Northern macrozone is notorious after the initial impact
of the pandemic and also in the recovery process, achieving above pre-pandemic levels in June 2020.
Particularly important in this macrozone is the fact that, beyond some adjustments to adapt to operating
protocols, mining has continued to operate throughout the pandemic.
On the other end of the spectrum, the macrozone most affected by the initial impact of the pandemic was the
Metropolitan, followed very closely by the Austral. However, in the recovery, the Metropolitan macrozone
showed greater dynamism, leaving the Austral lagging behind in its recovery until the end of the summer,
which, as has been raised in the IPN, may respond in part to the timing and extension of the quarantines. The
most stable series correspond to the South and Center-South macrozones, which exhibited moderate falls at
the beginning and a recovery with a slow pace-although somewhat higher in the second. In the Southern
zone, the different timings of the quarantines have been mentioned in the IPN as a cause of the delay in the
recovery.
What we report here is only a first tangible step in the direction of improving the timeliness and quality of the
territorial statistics prepared by the CBC. In parallel, we are developing a project to increase the frequency,
coverage, disaggregation, and timeliness of the Regional National Accounts. To achieve this objective, work is
being done mainly on: (i) the more intensive use of high-frequency administrative records, which complement
the information from surveys and studies currently available and (ii) the development of statistical methods
of territorial distribution of national aggregates, in line with what I have stated here. The results of this project
will be published during 2022 and will include quarterly series that will cover some variables of regional activity
from the perspective of origin and expenditure.
IX. Economic policy achievements and challenges in response to the Covid-19 shock
Two years ago, in this same room, I presented the last MP Report before the social crisis and Covid-19 radically
changed the scenario in which our economy breathes. Two unusual shocks, without an economic origin and
with characteristics very different from a traditional cycle, impacted the country transversally. Faced with this
scenario, those responsible for economic policy have had to deploy all the analytical capacity, resources,
instruments, and credibility accumulated over the years, to mitigate their impact on the living conditions of
the population and the solvency of companies.
As I noted at the beginning, the data for the second quarter of this year show us that the Chilean economy
has been able to exceed the levels of activity it had before the social crisis and the pandemic. According to the
projections that we pr