Chile - Economic Briefing April 2003

Economy Develops Favourably Despite Scandals  (continued)

Consumer prices surge in March and headline inflation shoots beyond upper limit of target range
In March, consumer prices added 1.17% over the preceding month. The increase blasted expectations, which had seen consumer prices increasing by an already unusually high rate of 0.7% in the wake of seasonal factors, which typically drive up the March reading. March also represented the highest monthly increase registered in more than five years. A combination of factors drove prices upward in the third month of the year: First, higher fuel prices pushed prices in transport and housing. Secondly, education prices surged, as is usually the case at this time of the year. Finally, prices for fresh fruits and vegetables rose again following on three consecutive months of strong declines. As a result of the March spike in consumer prices, annual headline inflation jumped from 3.8% in February to 4.2% in March and is now 1.7 percentage points above the 2002 year-end rate of 2.8%. The current spike is not only driven by transitory factors such as higher oil prices. Core inflation, which excludes the more volatile categories, namely fuels and fresh fruits and vegetables, is also showing a clear upward trend. In March, the core inflation index added 0.82%. Even so, the annual core inflation rate remained well behaved, reaching 2.4% in March after 2.1% in February. Nevertheless, if the current pace in core prices were sustained over the year, annual core inflation would reach double-digits. Consensus Forecast panellists have reflected the recent price pressures and have hiked their year-end forecast by 0.4 percentage points over last month. Given the recent price pressures and the setting of rising inflationary expectations, the Central Bank’s manoeuvring room to loosen monetary policy further is clearly limited and the Bank’s decision to maintain the policy rate unchanged at 2.75% in its regular monthly meeting on 8 April was largely expected.

Central Bank President resigns amid financial scandals
A number of scandals are shaking the country. After cases of alleged bribery in the Ministry of Transport and the Ministry of Public Works earlier this year, an insider information case tarnished the reputation of the monetary authority. The secretary of the Central Bank President had leaked information to financial service firm Inverlink. In the ensuing investigation at the company, investigators found that Inverlink had illegally seized financial documents for the amount of approximately US$100 million belonging to the state-owned economic development agency CORFO (Corporación de Fomento a la Producción). The discovery prompted a massive withdrawal from mutual funds, which had bought paper from Inverlink, and also hampered the functioning of the secondary market in state paper even though the amount involved represents only 0.1% of the total papers of the whole financial system. Assuming the political responsibility for the information leakage from his office, Central Bank President Carlos Massad resigned his post on 31 March. Massad will stay in office until 1 May. A new President has yet to be designated but markets rumour that Vittorio Corbo is the most likely successor. The nomination of the MIT-trained economist would be welcome by markets and would complement the current team of directors well.