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Consumer prices unchanged in June
In June, consumer prices remained unchanged. The price stability follows
on a downward trend observed in April and May and was below expectations,
which had seen prices rising by 0.08% in June. Lower prices for
transportation, clothes and household equipment offset rising prices in
food, housing, health as well as education and recreation. Despite the
price stability in June, annual headline inflation inched upward from 3.5%
in May to 3.6%, still almost a full percentage point below the 4.5% annual
inflation reading registered in March. The price index for core inflation
dropped 0.17% in June, taking the annual rate from 2.8% in May to 2.7%.
Thus, headline and core inflation remain within the Central Bank’s 2% to
4% target range, reconfirmed in its May 2003 inflation report. As a
result, Consensus Forecast panellists have maintained their year-end
inflation forecast unchanged over last month.
Peso
continues to strengthen after bout of weakness
The peso continued its strengthening trend initiated in mid-March
interrupted only briefly with a bout of weakness between mid May and
mid-June. Since 11 March, when the peso had reached an all-time high at
758 pesos versus the US$, the currency had strengthened substantially to
694 pesos per US$ by 14 May. The currency then lost some ground to 717
pesos per US$ until 12 June. Subsequently, the strengthening trend
resumed, bringing the currency to below the 700 pesos per US$ by the end
of June. The main reason for the strengthening observed in the recent past
seems to be increasing optimism about the development of the domestic
economy. Moreover, continued monetary easing in other economies, notably
the United States and the Euro Area, render the Chilean interest rate
setting more appealing to investors, which have also been attracted by the
buoyant stock market. The recent strengthening confirms previous Consensus
panellist perceptions that the weakening trend observed at the beginning
of the year did not reflect economic fundamentals and would consequently
be reversed by the end of this year.
Government cuts spending, hikes taxes in light of revenue shortfall
On 30 June, the government reported that fiscal revenues in 2003 are
expected to be US$ 420 million lower than planned. The revenue shortfall
is mainly due to drop in tax collection associated with the capital gains
tax, a reduction in sales of state-owned copper company CODELCO by 200,000
tons and the fiscal impact of lower tariffs resulting from the entry into
force of the free trade agreement with the European Union in February.
Since the revenue shortfall has not been caused by the economic cycle, the
government has decided to cut fiscal expenditure by US$ 300 million. In
addition, the government plans to generate higher revenues by raising
taxes. The cornerstone of the government’s tax plan is a one percentage
point hike in the value added tax (VAT) from the 18.0% to 19.0%. The VAT
increase will become effective in October 2003 and will last until
December 2006. It is anticipated to generate additional revenues of US$
322 million for the full year and US$ 80.5 million for the remainder of
2003. On 2 July, the Senate voted in favour of the VAT hike in a narrow
decision (25 to 22). However, the Senate rejected the government’s
proposal to hike the tax on diesel and no decision was reached on the
initiative to increase tobacco taxes. The latter measure has been sent
back to the Chamber of Deputies. If approved, the tax measure should
generate some US$ 12 million per year in higher taxes (US$ 4.5 million
during the remainder of 2003). The government initiatives to maintain a
tight fiscal regime were lauded by a mission from the International
Monetary Fund (IMF) that visited Chile in June. The IMF also applauded the
implementation of further capital market reforms and in general hailed the
authorities' macroeconomic policies and objectives. Consensus Forecast
panellists also confide in the government’s ability to contain the fiscal
deficit close to the 0.7% of GDP target for this year (implied by the 1%
of GDP structural surplus rule).
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