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Inflation
jumps in September. In September, consumer prices showed
a pronounced spike, increasing 0.61% over August, more than twice the
monthly rate observed in the past four months. The annual rate
increased from 3.9% in August to 4.2% in September. Since December
1999, when inflation reached a historic low at 2.3%, the annual rate has
persistently crept upward to the current level, which is now beyond the
year-end Consensus Forecast rate of 4.1%. The September price hike
was mainly driven by higher fuel prices, which affected transportation
costs. In fact, the 2.5% increase in transportation prices accounted
for more than half of the total price hike. However, other
categories also drove the price index higher, chief among them housing.
As a consequence, underlying inflation, the key indicator watched by the
monetary authorities, increased 0.4% over the month before, taking the
annual rate to 3.0% from 2.8% in August. This is still below the
rate seen by the Central Bank in the last quarter of this year (3.5%
underlying inflation and 4.6% for the overall index). Therefore, the
Central Bank is likely to hold off raising interest rates until next year,
after the surprising rate cut on 28 August (see September edition).
Consensus Forecast panellists have accounted for the more expansionary
attitude by lowering their year-end interest rate forecast. The
expected pickup in domestic demand, however, will prompt higher interest
rates next year.
Budget
discussions begin. On 1 October, the government submitted
the 2001 budget proposal to Congress. The draft bill proposes a 5.0%
real increase in spending over this year, to about US$ 17.8 billion.
The government has placed particular emphasis on social spending, which is
planned to increase by 7.4% in real terms and will account for about 70%
of total expenditures. In addition, next year’s budget has
assigned funding for the creation of approximately 46,000 new jobs,
particularly in the construction sector, where unemployment currently
stands at 20%. The government reiterated its commitment to end next
year with a structural fiscal surplus equal to 1.0% of GDP. However,
the underlying assumption of 6.2% GDP growth is at the upper end of the
expectations and contrasts with the Central Bank’s latest projection of
5.7% growth. For this year, panellists anticipate a fiscal deficit,
despite recent government assurances that the fiscal deficit will amount
to only 0.1% of GDP, owing to increased revenues from privatisations and
tender offers.
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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