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Chile
exits deflation
Chile has exited the deflationary bout that lasted for two months between
March and April this year. In May, consumer prices increased 0.52%,
which was well above market expectations of 0.38% and also exceeded the
0.37% increase observed in April. Transportation costs experienced a
notable upward shift and thus accounted for the lion share of the May
price increase. As a result of the May price spike, the annual rate
of consumer price variation, which was negative in April, picked up from
-0.3% to +0.6% in May. Prices thus seem to be developing according
to the Central Bank’s expectations, which see monthly price movements
returning to normal in the next months, amid the pick up in domestic
demand. However, giving the 'all-clear' signal would be premature,
as the recent price increase is mostly related to erratic price shifts in
fuels as well as in fresh fruits and vegetables. In May, the core
inflation index, which excludes these volatile categories, increased only
0.06%, which took the annual rate from slightly below zero to just above
the zero mark in May. The Central Bank acknowledges that core
inflation is currently below its expectations but confirmed that inflation
should reach the central target of 3.0% within the usual policy horizon of
24 months. In order to achieve this objective the Central Bank is
likely to maintain its accommodative monetary policy stance and should
abstain from raising its policy rate - currently at 1.75% - in the near
future. Consensus Forecast panellists share the assessment of the
Central Bank and maintained their year-end inflation forecast unchanged
over last month at 2.0% and at 2.8% by the end of 2005.
Current
account surplus rises amid strong copper exports
In the first quarter, the current account balance incurred a surplus of
US$ 746 million. The surplus reverted the US$ 317 million deficit
registered in the fourth quarter and also exceeded the US$ 271 million
surplus observed in the first quarter last year. The increase in the
current account surplus over the same period last year was mainly due to a
higher trade surplus, which more than doubled from US$ 1.0 billion in the
first quarter 2003 to US$ 2.3 billion in the first quarter 2004. The
higher trade surplus, in turn, reflects a massive increase in exports
(+39.0% year-on-year) in the wake of the strong rise in both volumes and
prices of copper, Chile’s main commodity.
Capital
account incurs deficit due to higher commercial loans related to exports
The capital account balance registered a net outflow of US$ 1.3 billion,
which exceeded the current account surplus by a sizeable margin. In
the same period last year, the capital account had recorded a surplus of
US$ 465 million. The deterioration in the capital account was mostly
concentrated in “other investments”, in particular short-term loans.
The deterioration reflects an increase in commercial loans related to the
strong increase in exports. Portfolio investment flows reverted from
a US$ 517 million surplus in the first quarter 2003 to a US$ 489 million
shortfall in the first quarter this year, as Chilean pension funds
continued to raise their investments abroad. The drop in portfolio
investment, however, was compensated for by a strong increase in foreign
direct investment (FDI), which rose from US$ 291 million last year to US$
1.5 billion in the first quarter this year, the highest level since 2001.
The improvement in FDI, reflects lesser investment of Chileans abroad but
also higher reinvestment by foreign mining operators, which stepped up
their investments amid stronger commodity prices.
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