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Government
announces recovery plan. In the light of the continuously
rising unemployment the government has reacted by speeding up the planned
labour reform, which will be sent to Congress in September. In
addition, on 28 August, the government announced a recovery plan comprised
of eight single measures, including a one-off transfer of 10,000 pesos
(some US$ 18) to 800,000 poor families in order to offset the increase in
the cost of public transportation caused by higher oil prices; an advanced
tax rebate of up to 200,000 pesos (US$ 370) that could benefit about 1
million individuals, a restructuring of tax arrears for small and
medium-sized companies and easier credit access for small business.
The measures are aimed to augment the purchasing power of the poorer
spheres of society and should help revive consumption. However,
cautious not to exceed budgetary constraints, the measures sum up to only
US$ 32.2 million in total, an amount that certainly falls short of
jump-starting consumption in a US$ 68 billion economy. As a
consequence, the business community has reacted lukewarm to the
government’s efforts.
Central
Bank lowers interest rate amid rising inflation. On the
monetary front, the Central Bank emulated the government’s efforts to
revive the economy. In an extraordinary meeting on 28 August – the
regular meeting was slated for 6 September – the monetary authority
decided to reduce its target overnight rate 50 basis points to 5.5% in
real terms. The Central Bank justified the unexpected move by
stating that, although the economy continues to expand, growth rates in
domestic sales have decreased and unemployment remains high, while
underlying inflation (which excludes the volatile categories of fresh
fruits, vegetables and fuels) remains stable. Nevertheless, the
National Statistical Institute (INE) reported that consumer prices spiked
0.26% in August, taking the annual price increase to 3.9% from 3.8% in
July. Underlying inflation increased at a lesser rate (2.8%
year-over-year) but is also up from the 2.7% reported in July. The
Central Bank’s decision to lower interest rates has done nothing to halt
the slide of the peso, which reached a new record low on 8 September at
569.5 against the US$.
Current
account deficit higher than expected. On 23 August, the
Central Bank announced that the current account deficit reached US$ 703
million in the second quarter based on preliminary information. The
result was above market expectations and contrasts sharply with last
year’s US$ 50 million surplus. The deterioration of the current
account is mainly due to the strong increase in imports in the second
quarter and, to a lesser extent, to the increased net outflows in the
financial services balance. Despite a strong increase in imports,
the trade balance remained positive as rebounding exports (+11.2%), in the
wake of higher commodity prices (particularly copper), partially offset
the 26.8% increase in imports. However, the surplus shrank
significantly from US$ 544 million in Q2 1999 to the current US$ 81
million and could quickly turn into a deficit if commodity prices should
deteriorate.
Note:
The above text is an abridged version of the LatinFocus Consensus Forecast
briefing on Chile and includes information available up to 10 September. For more details please click here.
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