Chile - Economic Briefing February 2003

Adjustment to Moderate Growth Expectations  (continued)

Inflation remains contained in January despite fuel price pressures
In January, consumer prices increased 0.10%. The January consumer price increase was below the 0.18% expected by the Consensus but reversed a 0.44% decline registered in December. Higher transport prices pushed the general price level higher, pressured by higher fuel prices, which jumped 6.8% in January alone. Most other price categories surveyed by the National Statistical Institute (INE) recorded lower prices. In particular lower prices for food, clothing and health mitigated the impact of higher transportation prices. The annual headline inflation rate rose from 2.8% in December last year to 3.0% in January. Core inflation, which excludes the erratic movements of fuel prices, dropped from 1.8% in December to 1.7%.

Monetary authorities expect benign inflationary environment
In its regular Monetary Policy Report, which is presented to the Senate in January, May and September, the Central Bank stipulated its outlook, given the ongoing inflation target range of 2% to 4%. In general, monetary authorities see inflationary pressures well in check with upside risks resulting from higher oil prices in the wake of a protracted military action in the Middle East and from a potential weakening of the exchange rate. According to the Central Bank baseline estimates, which assume a notable decline in oil prices from current levels to US$ 23 per barrel by the end of the year, headline inflation will end the year at 2.1%, rising to 2.8% by the end of 2004. Core inflation is seen to develop along a similar but more stable trajectory, hovering around 2.0% for several quarters and ending 2004 at 3.0%. In an alternative scenario, the Central Bank accounts for the possibility that oil prices do not drop as anticipated in the baseline scenario and remain instead around US$ 30 per barrel throughout the forecast period. In this case, the Central Bank estimates headline inflation to exceed baseline forecasts by one percentage point in 2003 and half a percentage point in 2004. Consensus Forecast panellists share the more benign inflationary outlook of the central scenario. The Consensus remained unchanged since last month at 2.8% for the end of the current year and 3.0% at the end of 2004.

Trade surplus rises in 2002 amid weaker imports
In December, the trade surplus reached US$ 207 million, twice the surplus recorded in November. With the year-end up tick in the trade balance, the surplus for the year as a whole reached US$ 2.4 billion, ahead of the US$ 2.1 billion registered in 2001. The increase of the surplus was due to a stronger decline of imports (-3.5%) than exports (-1.2%). Exports suffered particularly from a more adverse international setting for copper exports, which dropped 7.0% in 2002, almost repeating the decline observed in 2001. However, unlike the copper-price induced export decline in 2001, the drop in 2002 resulted from lower volumes, as prices remained virtually unchanged. Imports declined amid weak intermediate and capital goods inflows, whereas consumer goods dropped more moderately (-1.6%). For 2003, panellists are optimistic that trade flows will rise again with almost balanced growth rates of exports (+6.8%) and imports (+7.3%). The trade surplus is seen to rise to 2.7 billion.