Chile - Economic Briefing March 2002

Central Bank Loosens Monetary Reins to Stimulate Economy

Unemployment remains a major concern for policymakers, as the rate is already beginning to pick up contrary to seasonal patterns. In order to boost consumption and investment, the Central Bank decided to loosen the monetary reins for the second time this year. Despite a recent spike in headline inflation, inflationary pressures are likely to be kept at bay as long as the anticipated uptick in global demand feeds through to the domestic side of the economy. 

Economic performance disappoints in December

In December, the monthly indicator for economic activity (IMACEC) was up by 1.4% over December 2000.  The December reading was disappointing compared to last month’s expectations of 2.5% growth and follows on similarly weak November economic growth.  The figures for the last two months of 2001 constituted the weakest readings in the year, a sign that the economy remains far from pulling clear from sluggish growth.  According to seasonal adjusted data the economy even contracted in the last three months of the year.  Compared to the preceding month, the economy lost 0.3% in December, following a 0.1% drop in November.

Industry performs well but unemployment ticks upward again

January sent a mixed bag of signals about the current state of the Chilean economy.  Industrial production expanded by 4.5% and industrial sales increased by a strong 8.6% over the same period in the prior year.  The above trend growth rate augurs well for a strong industrial expansion in the first quarter, which could provide the backdrop for a healthy growth this year.  Panellists remain sceptical though and expect industrial production to increase a moderate 3.2% this year.  The key impediment for stronger growth on the domestic side is the stubbornly high unemployment.  Contrary to seasonal patterns and to expectations, unemployment ticked upward a 0.1 percentage point to 8.0% in the moving quarter up to January.   Without the currently active public employment programmes, unemployment would be one percentage point above the actual figure.  With seasonal hiring abating, unemployment will start rising again soon.  In fact, Consensus Forecast panellists see unemployment up at 8.3% in February and ending the year at 8.9%. 

Long-term forecasts adjust to more moderate growth rates

Preliminary data for 2001 indicate that the Chilean economy expanded by 2.9% last year.  Compared with other economies in the region this may seem a respectable result.  By Chilean standards, however, the growth rate is considered disappointing by most analysts, as it constitutes the first reading below 3% in the past decade - apart from the recession in 1999 - and also remains far below the average annual growth rate of 6.5% in the 1990s.  In fact, the notion that the Chilean economy will continue to expand at the record growth rates seen in the past is giving way to more moderate expectations, which nevertheless remain above the regional average.  The GDP growth forecasts for 2003 and 2004 have been constantly lowered in the past months.  For this year, panellists maintained their forecast unchanged, which is at the lower end of the current government estimate of 3% to 4%. 

Consumer prices remain unchanged in February; annual headline inflation rises

In February, consumer prices remained unchanged.  The National Statistical Institute (INE) reported that prices were stagnant, as the price of food dropped 0.1%, clothing prices declined 0.3% and housing prices were unchanged.  Price declines in these categories compensated for price increases in health as well as in education and recreation.  The zero price movement follows on three consecutive months of declining consumer prices, which had lowered the annual headline inflation rate from 3.9% in September 2001 to 2.2% in January.  The unexpected price stability – Consensus Forecast panellists had expected yet another month of price declines – drove the annual inflation rate up to 2.5%.  Panellists believe that inflation will pick up further towards the end of the year, when the increase in domestic demand will once again exert pressure on consumer prices.  

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

The Central Bank used the fourth month of price declines as a pretext for loosening monetary reins.  In its regular monthly meeting on 19 February, the Central Bank board decided to lower the monetary policy interest rate by 50 basis points from a nominal 6.0% to 5.5%.  This is already the second interest rate cut this year (following the 50 basis point cut on 10 January).  As in its decision last month, the Central Bank cited the weak global economy as well as the weaker than expected domestic demand as reasons for its decision to lower the interest rate once again. 

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