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June headline inflation drops but core inflation
inches upward. In June, consumer prices inched upward 0.06%
over May, as a drop in transport and clothing prices offset hikes in food,
housing and health prices. The annual inflation rate fell from the 3.7%
in May to 3.6%. The core inflation index, which excludes the more
volatile prices for fuel and fresh fruits and vegetables, increased by
0.25%, shifting the annual rate upward a notch to 2.7% from 2.6% in May.
Since February, annual headline inflation has hovered between 3.5% and
3.8%, still well above the Central Bank’s 3.2% year-end target. The
Consensus Forecast maintains its higher inflation forecast, just a notch
below last month. For 2002, panellists expect prices to increase and
remains above the monetary authorities target.
Central Bank cuts interest rate to record lows
amid economic slowdown and high unemployment. At its regular
monthly meeting on 12 June, the Central Bank Board decided to cut its
interbank lending rate for a fifth time this year from 3.75% to 3.50% over
inflation. The Central Bank move brought the interest rate to the lowest
level observed in 15 years. In its statement, the Board justified the cut
as necessary given that the economy had grown at a slower pace than
expected in May and that unemployment continued to rise. Furthermore,
monetary authorities claimed that without a monetary adjustment inflation
would drop below 3% this year. The dismal recent data releases could
serve as a pretext to further ease monetary policy at the upcoming 12 July
Board meeting. Panellists have revised their forecast for the benchmark
PRBC 90-day rate downward by 0.3 percentage points by the end of the
year. The anticipated pick-up in domestic demand next year should warrant
some monetary tightening, with interest rates firming by the end of 2002.
Peso continues to loose ground on monetary
easing, Argentina concerns and falling copper prices. In June,
the Peso continued the slide initiated in mid-February, when the Peso
stood at 560 to the US$. When compared to the end of December 2000, the
Peso has lost some 11.5% of its value nominally against the US$, reaching
647 Pesos to the US$ on 6 July. In part, the recent depreciation was
prompted by fears that further monetary easing could erode the returns of
Peso denominated assets. More important, however, was market uneasiness
over potential spill-over effects from the developments in Argentina.
Similar to the Brazilian Real, the Chilean Peso weakened on concern that
the Argentine government is losing political support for its efforts to
boost growth and come up with funds to service its debt. In addition, the
continuous slide of copper prices, which have slipped to their lowest
level in more than two years (see chart) has further undermined confidence
in the Peso. The Central Bank reacted to the weakening and on 6 July
announced it would inject US$ 1 billion into the currency market to prop
up the battered Peso, its first such intervention since 1999. The Bank
will issue US$-denominated promissory notes (PRDs, Pagarés Reajustables en
Dólares) over the next six months to satisfy increased demand for the
US$. Panellists perceive the weakening of the Peso as a temporary
phenomenon and expect the currency to firm by the end of the year. Next
year, the currency should experience more stability.
Note:
The above text is an abridged version of the LatinFocus Consensus Forecast
briefing on Chile. For more details please click here.
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