Central Bank leaves interest rate unchanged.  In its last board meeting, on 10 August, the Banco Central de Chile decided to maintain its benchmark interest rate at 5.50%.  The decision was widely expected since the underlying inflation reading was in line with medium-term inflation targets and the slower than expected recovery in domestic demand renders a spike in consumer prices less likely.  Some market observers even demanded a reduction of the interest rate to revive sluggish investment.  Barring major changes in the international capital markets, the Central Bank should maintain its current position until domestic demand shows clearer signs of a recovery. 

Peso weakens.  The Chilean peso lost substantial ground in July.  The exchange rate ended July at 556 pesos per US$, its weakest ever closing level against the US$.  Since the end of March the peso has depreciated almost 10% against the US$.  The weakening is the result of the sluggish domestic demand, which keeps interest rates in check and stems capital inflows.  Lower than expected inflation and the Central Bank’s decision to keep the interest rate unchanged has further eroded confidence in the currency, which depreciated further to 552.6 pesos per US$ on 11 August.  

Pinochet faces trial.  On 8 August, the Chilean Supreme Court decided in a 14:6 ruling to strip former dictator Augusto Pinochet of parliamentary immunity, paving the way for him to be tried for alleged human rights abuses.  Pinochet is now accused by Chilean investigating judge Juan Guzman of involvement in the so-called "Caravan of Death".  A military squad strayed Chile after the bloody military coup in September 1973 and is believed to have killed at least 72 dissidents.  According to Chilean law, Guzman must order medical tests to assess Pinochet’s mental fitness to stand trial.  Under Chilean law, only mental incapacity - and not physical illness - is seen as grounds for avoiding trial.  Observers believe that legal obstacles could still delay any trial for years.  While the Pinochet case still divides society it is not expected to alter the course of the current socialist-led government of Ricardo Lagos.

Note:  The above text is an abridged version of the LatinFocus Consensus Forecast briefing on Chile.  For more details please click here.

For five-year forecasts, please click here.