Chile - Economic Briefing February 2002

Waiting for Global Recovery (continued)

Yet another deflationary bout in January

In January, consumer prices dropped 0.1% over the previous month, following a larger 0.3% price decline in December.  Food and housing experienced the most pronounced price declines, whereas the health and the education/recreation sectors registered price increases of 0.5% and 0.1% respectively.  The broad based and persistent price decline reflects sluggish consumer demand.  However, the drop is in part also due to lower oil prices and volatility of fresh fruit and vegetable prices.  The core inflation index, which excludes these items, actually increased by 0.14% taking the annual core inflation rate to 3.3% in January from 3.2% in December. Annual headline inflation dropped from 2.6% in December to 2.2% in January.  The more benign inflationary environment has prompted panellists to lower their forecasts for year-end headline inflation by 0.4 percentage points.

Central Bank lowers interest rate as weak economy keeps inflationary pressures at bay

In its first regular monthly meeting on 10 January, the Central Bank board decided to lower the monetary policy interest rate by 50 basis points from a nominal 6.5% to 6.0%.  The Central Bank board expects the global economy to pick up speed in the second half of this year and estimates that the impact of the Argentina crisis on Chile has been largely absorbed by now and considers any further potential movements as merely transitory.  The board cited mainly domestic reasons as responsible for its decision, as any pass-through to domestic prices from any additional currency weakening was dismissed.  According to the Bank, inflationary pressures stay subdued since domestic demand is weak, the oil price remains on sustainable levels and the economy is operating below potential output and unemployment remains high.  Therefore, the monetary authorities consider the lowered interest rate as consistent with keeping actual inflation close to the centre of its target range of 2 to 4%. 

Trade continued to drop in December amid weak copper prices and subdued domestic demand

In December, the trade balance surplus reached US$ 271 million with exports at US$ 1.3 billion compared to 1.0 billion in imports.  While the trade balance remained virtually unchanged compared to December 2000, both exports and imports dropped by 11.5% and 12.2% respectively.  For the whole year, the changes in trade flows are less dramatic: exports dropped 4.0% and imports 5.1%.  However, the downward trend remains intact.  The weak performance of the export sector is largely due to the subdued copper price, which in 2001 was on average 13% below its 2000 level.  As a result, copper exports, Chile’s main export item, fell 8.2% in 2001, even as part of the price decline was compensated for by an increase in volume.  Non-copper exports registered a much more moderate decline in 2001 mainly due to weaker agricultural exports, whereas industrial exports were flat over 2000.  The decline in imports in the past year was most pronounced in consumer goods, which dropped 7.0% in 2001 compared to a 4.9% drop in intermediate goods and 2.1% decline in capital goods.  The over-proportional decline in consumer goods can be attributed to the persistently high unemployment, which has kept a lid on domestic demand. 

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.