Central Bank eliminates capital controls.  Prior to the government’s announcement of the capital reforms, on 16 April, the Central Bank decided to eliminate the remaining controls on capital inflows and outflows to encourage portfolio investment and help resuscitate small and medium-sized business.  The measures eliminated the authorization requirement for capital inflows related to foreign credits, investments, capital contributions, bonds and ADRs; the authorization requirement for capital outflows associated with capital gains, dividends, and other benefits associated to investment and prepayment of external loans; the requirement of obtaining a minimum risk rating in order to issue bonds; and the restrictions to ADR issuance.  The Central Bank also eliminated the so-called encaje, which obligated foreigners to deposit a percentage of their total investment with the Central Bank to prevent a sudden withdrawal.  Although the Central Bank had reduced the encaje to zero in 1998, the administrative mechanism itself was maintained.  Although the direct impact of the measures will be hardly noticeable, they will serve to bolster Chile’s position as an attractive target for investment in the region.

Inflation rate remains unchanged.  In April, consumer prices increased 0.46%, virtually unchanged from the 0.48% increase registered in March but above market expectations of 0.38%.  Price hikes in transportation accounted for more than half of the April increase, which was further fuelled by much more moderate price increases in health, housing and food.  The annual headline inflation rate remained unchanged from March at 3.5%, while core inflation also remained stable at 2.5%.   

Central Bank cuts interest rate.  At its regular monthly meeting on 10 April, the Central Bank Board decided to cut its benchmark lending rate for a fourth time this year from 4.0% to 3.75% above inflation.  The Board cited that the low domestic demand growth and the slowdown in the global economy are holding inflationary pressures in check.  As a consequence, monetary authorities believe that the latest cut is in line with a 3% inflation rate in the next 12 to 24 months.  However, the current 3.75% level for the benchmark lending rate, which represents the lowest level in about 14 years, seems to be a minimum threshold given inflationary pressures resulting from the current weakness in the Peso, which had depreciated to 603 pesos to the US$ on 11 May.  At the regular monetary policy meeting of the Central Bank Board on 10 May, authorities left its benchmark lending rate unchanged at 3.75% above inflation.  Panellists have lowered their year-end interest rate forecast.  However, the anticipated pickup in domestic demand next year should warrant a tighter monetary policy, with interest rates firming.

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.