MNI INTERVIEW: Chile Should Cut Rates Faster-De Gregorio

The Central Bank of Chile should cut rates more aggressively given a sluggish economy, its former governor Jose de Gregorio told MNI, adding that there is little chance of a significant rebound in inflation or a return to monetary tightening either in Chile or elsewhere in Latin America.

The central bank is likely to debate whether to cut by 100 or 75 basis points at its next meeting in April, De Gregorio said. It cut by 100bp to 7.25% at its last decision in January, when one dissenter voted for a 125bp reduction.

"If I were at the central bank, I would cut 125 basis points at the next meeting," he said in an interview. "Chile has rates at 7.25% with inflation between 3% and 4% and a fairly weak economy. Therefore, it should be much closer to 4% than 7.25%. The question is how to do this, and at the moment, there is difficulty regarding the data.”

De Gregorio, who also served as economy minister and is currently dean of Economics at the University of Chile and senior fellow at the Peterson Institute for International Economics, said that recent data showing a rise in inflation and a marginal improvement in activity probably does not represent a trend.

"The central bank could have cut rates more aggressively because the economy did not grow at all last year, and inflation according to almost all measures was already completely contained," he said. "The central bank might think that with the recent bad inflation data and the good activity data, that they are going to be a little more cautious.” (See MNI POLICY: Inflation Data To Ease Brazil Cenbank Wage Nerves)

FORWARD GUIDANCE

At a time when Latin American central bankers have been debating how to signal the likely further steps of monetary policy, De Gregorio said he favored clear forward guidance. (See MNI POLICY: Banxico Set To Discuss Forward Guidance)

"The dollar is strengthening worldwide. The currencies of Latin American countries are weakening, and there is fear of their inflationary impact. In that context, for example, it is very useful for the central bank to anticipate its policy via forward guidance and to take the temperature of market reactions. It is important that it is not a fixed commitment because then the central bank would lose the flexibility to act. But I think it is very useful in times like these," he said, adding that the recent depreciation of the Chilean peso against the dollar was no cause for concern and the currency “has to float.”

INFLATION SURGE

While inflation is spiking higher around the region, De Gregorio sees little possibility of a return to rising rates.

"Inflation is returning to levels that are considered normal. Some countries are a little above, others a little below [the target]. Chile has experienced a sharp drop in the inflation rate and is now experiencing a small rebound, these are things that are going to happen. I believe that at most, what this will mean is that the speed at which different countries withdraw monetary restraint will vary, according to the evolution of inflation," he said.

"Probably, if we see any inflationary complications, it is most likely that central banks will slow down reductions in rates, but they will not have to raise them again. There is no evidence of any significant need to raise rates again.”

In his view, Latin America and emerging economies in general have shown excellent macroeconomic management in the wake of the pandemic.

"These are economies that know how to handle macro. We have gone through the international financial crisis, the Covid crisis and nothing has happened. However, I think the big problem we have in the region and in many emerging economies is that we do not know how to grow vigorously. I think that that’s the challenge," he said, adding that the resilience of activity might be related to gains in structural productivity. (See MNI INTERVIEW: Latam Neutral Rates Stable Through Pandemic)