Jose de Gregorio, the governor of Chile’s central bank since December 2007, is a marathon runner – when he has time. Over the past year, however, his time and stamina have gone into a different sort of race – that of protecting his country’s small economy from the effects of the international recession.
But, for 50-year-old de Gregorio – selected by Emerging Markets as Latin America’s Central Bank Governor of 2009 – that award is not his only prize. Given Chile’s openness to international trade, dependence on foreign investment and the comparative depth of its financial markets, it was, on paper, one of the Latin American economies most vulnerable to the crisis, yet according to consensus local forecasts, GDP will slip by only 1.5% this year before recovering to growth of 3.6% in 2010.
In Latin America and, indeed, in emerging markets in general – excluding some special cases in eastern Europe, the crisis has had much less impact than in industrialized countries, notes de Gregorio. “Normally when there was a crisis in a developed country we did worse, whereas today we’ve done relatively better.”
“Look at the debt crisis, which had a similar origin in that it was totally external... Latin America collapsed,” he points out. By comparison, the current crisis is “a success for the economic policies applied in Latin America”, he maintains.
In Chile’s case, those policies include the inflation-targeting and flexible exchange-rate policies implemented by the autonomous central bank in the 1990s and a counter-cyclical fiscal rule introduced in the early 2000s by the government of president Ricardo Lagos, under whom de Gregorio served as minister for economy, mining and energy before joining the board of the central bank in June 2001.
Chile’s central bank has, however, been particularly aggressive in cutting its benchmark interest rate, reducing it from 8.25% at the end of last year to 0.50% by July – a level that the central bank described as “minimum”. These cuts had to do with the need to counteract weak domestic demand but, above all, with guarding against too large a drop in inflation, says de Gregorio.
“Never before has the rate been so low in Chile,” he notes. But this does not mean that Chile has exhausted its arsenal of monetary tools, he insists.
It can still, if necessary, extend the term of a lending facility, introduced in July, under which commercial banks have guaranteed access to financing at the current monetary-policy interest rate for six months and, beyond that, there’s the possibility of quantitative easing, points out de Gregorio.
Looking ahead, de Gregorio anticipates that the main risk facing Latin America is the performance of the international economy. “The key question is whether recovery will be vigorous or whether it will encounter additional shocks, and there we have many doubts.”
In Chile, de Gregorio doesn’t see any major domestic barriers to sustained recovery. However, as he recognizes, that doesn’t exempt Chile’s central bank from the challenge facing monetary authorities around the world – that of knowing when to take the foot off the monetary accelerator.