Chile inflation climbs as miners, govt focus on coronavirus measures

Annual inflation in Chile edged toward the upper limit of the central bank’s 2-4% target range in February, overshooting market forecasts, as mining companies and the government work on coronavirus contingency measures.

Monthly inflation printed at 0.4%, pushing the 12-month reading up to 3.9%.

A key factor was a weakening of the peso, which has been impacted by global turbulence whipped up by the virus, compounded by fallout from local unrest. At least five confirmed cases of coronavirus have been reported in Chile.

“In short, the CPI data for February reflects a forex feedthrough greater than that seen in recent months, which may continue owing to the additional depreciation observed in the past few days,” the research unit of asset manager Inversiones Security, part of local financial services player Grupo Security, said in a note. 

The unit forecasts a 50-basis point rate cut this month on account of less favorable external conditions. The research unit of Santander Chile said central bank policy makers will be “extremely cautious” in terms of decision-making.

Annual inflation was running at 3.5% in January, climbing from 3.0% in December. 

Finance minister Ignacio Briones said the February CPI reading was largely expected and that the effects of the stronger dollar were temporary in nature, local paper Diario Financiero reported. 

The peso was trading at around 830 to the dollar on Friday afternoon, compared with about 817 a week earlier. 

Chile is not alone. “The Brazilian real, Chilean peso, Colombian peso, Peruvian sol, Argentine peso and Mexican peso have all depreciated against the dollar YTD, hitting record lows,” ratings agency Fitch said in release. “The depreciation reflects a number of factors including commodity declines, downside risk for economic growth, and heightened political and investor uncertainty.”

Resumption of normal economic activity globally will depend on how long it takes to contain the global spread of the virus, fellow ratings agency Moody’s said in a G20-focused statement, adding that “even if the virus is steadily contained, the outbreak will dampen global economic activity well into Q2 of this year.”

In Chile – which has the strongest credit rating in Latin America – February inflation was primarily driven by increases in transport and food prices. 

The research unit of local bank Bci forecasts March inflation will print at 0.3-0.4% and that inflation should start to moderate amid weakened demand.

The finance ministry, in its latest estimate, expects GDP growth to reach 1.3% this year before accelerating to 2.6% in 2021. January’s economic activity reading surprised to the upside. A temporary boost in government spending should help offset a possible drop in private investment this year.

Solid, sustained growth is vital to any plan to boost public spending, government officials have said. Better pensions, public healthcare and education were among the demands voiced by protestors last year.

HEALTH SPENDING

Meanwhile, Briones said health ministry budgetary constraints would be eased to ensure an effective response to coronavirus.

Chilean authorities are speeding up investments of over US$2.14bn to finish five hospitals this year against the backdrop of the epidemic.  

This year authorities are due to open Félix Bulnes hospital in Santiago (April), Ovalle hospital in Coquimbo (April), New Gustavo Fricke hospital in Viña del Mar (May), New Angol hospital in Araucanía (June) and Padre las Casas health center  in Araucanía (July).

MINING, EXPORTING

In the mining sector, companies are working on contingency plans, mining minister Baldo Prokurica said. 

“In addition to the preventative plan of the health ministry, mining companies are aware of and addressing the matter,” he was quoted as saying by local paper La Tercera. “We will draw up a common proposal for the purpose of taking necessary measures, especially in places where many people mix.”

On the export front, trade promotion agency ProChile is working with exporters to mitigate the impact of coronavirus-related disruption.

A small, open economy, Chile is among the countries in Latin America most exposed to a slowdown in China, at the epicenter of the epidemic.