Inflationary pressures picking up despite the downturn in domestic demand.  In spite of the slump in economic activity, prices experienced a sharp surge in August.  According to INE, consumer prices increased 0.8% in August.  Food and transportation were the main drivers behind the price surge.  As a result, the annual inflation rate, which had dropped from 3.6% in June to 3.2% in July, following the deflationary bout in that month, rose again to 3.8% in August.  Wholesale prices increased an even stronger 2.7% -- the annual rate now stands at 9.9% -- and the core inflation index added 0.5%, taking the annual rate from 3.1% in July to 3.5%.  Despite the unexpected surge in consumer prices panellists have further lowered their year-end inflation forecast.  Meanwhile, the Central Bank has decided to maintain the newly introduced nominal interest rate at its current level of 6.5%, as the recent price pressures limit the Central Bank’s ability to provide further monetary stimulus. 

Central Bank intervenes in foreign exchange market to halt slide of the peso.  In order to stem price pressures resulting from the peso weakness, the Central Bank has decided to intervene in the foreign exchange market.  On 16 August, the Central Bank announced it would designate an amount of up to US$ 2.0 billion in international reserves to sell dollars directly in the foreign exchange market over the remainder of this year.  Monetary authorities also announced they would increase the placement of dollar-denominated notes (PRDs, Pagarés Reajustables en Dólares) to US$ 2.0 billion.  This adds to previously announced amount of US$ 2.5 billion and puts a ceiling of US$ 4.5 billion on the issue of these notes through the end of this year.  According to the Central Bank, the measure aims only at smoothing out volatility and does not imply a target for the exchange rate.  Surprisingly, the Central Bank has not been as active in the foreign exchange market as market participants had believed.  According to the Central Bank, it has only sold US$ 36.5 million to commercial banks in August and international reserves have, in fact, risen by US$ 207 million to US$ 14.7 billion by the end of August.  The market has reacted favourably to the announcement and the Peso has recouped some of the territory lost in the previous month.  On 7 September, the Peso stood at 667 to the US$, compared to the historic low of 691 Pesos to the US$ on 17 August, when the Chilean Peso was the third-worst performing currency in the world after the Brazilian Real and the Turkish Lira. 

Current account balance improves on stronger exports but capital account balance deteriorates as short-term capital leaves country.  In the second quarter, the current account deficit was virtually unchanged from the first quarter at US$ 90 million and down from US$ 622 million registered in the second quarter last year.   The improvement over last year was due to a widening of the trade surplus by US$ 564 million, which resulted from stronger exports (+7.6% year-over-year) and weaker imports (-5.6% yoy).  Meanwhile, the capital account registered a deficit of US$ 188 million, which compares to surpluses of US$ 46 million in the first quarter this year and US$ 271 million in the second quarter of 2000.  The deterioration of the capital account balance was mainly driven by net outflows of short-term capital whereas foreign investment flows, both direct and portfolio, improved.  The annual current account deficit dropped from US$ 1.5 billion (2.4% of GDP) in the first quarter to US$ 1.0 billion (1.6% of GDP) in the second quarter. 

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.