Chile - Economic Briefing August 2004

High Unemployment Overshadows Economic Growth (continued)

Inflation continues to rise moderately
In July, consumer prices increased 0.23%, which was well above market expectations of no price variation and below the 0.43% increase observed in June.  Housing costs experienced a notable upward shift and thus accounted for the lion share of the July price increase, which was mitigated only by lower prices for clothes.  As a result of the July price increase, annual headline inflation rose from 1.1% in June to 1.4% in July.  Moreover, the core inflation index, which excludes volatile categories such as oil and fresh fruits and vegetables, increased 0.40%, which took the annual rate from 0.6% in June to 1.0% in July.  Prices thus are developing according to the Central Bank’s expectations, which had anticipated inflation returning to normal from a temporary deflationary period in the March/April period this year.  In its last policy report from May 2004, the Central Bank 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 the benchmark policy rate - currently at 1.75% - in the near future despite the resilient economic growth figures.  Consensus Forecast panellists share the inflation assessment of the Central Bank and again raised their year-end inflation forecast from 2.1% last month to 2.3%.  By the end of 2005, inflation will reach 2.8%, according to the Consensus. 

Congress rejects government’s royalty plans
Last month, the government sent a Bill to Congress that imposes a royalty to the mining industry for the exploitation of non-renewable resources, and creates a “fund for innovation” that would be financed with these proceeds.  The government’s initiative plans to introduce a 3% tax on total sales for metal mining companies, and a 1% tax for non-metal mining companies, with exemptions for small mining operations and for companies with a low profit margin.  On 21 July, the Chamber of Deputies approved the overall bill but fell short of the four-sevenths approval needed to pass the central piece of the legislation.  Sixty-one lawmakers approved the bill but 66 votes were needed, which the conservative opposition opposed.  Despite what is technically a nay vote, the bill remains alive and now goes to the Senate, where the government is expected to reintroduce the article.

IMF concludes consultation and lauds economic management
On 4 August, the International Monetary Fund (IMF) concluded the Article IV consultation with Chile.  As has become customary, the IMF lauded the model country for its sound and consistent policy framework, which has been based on fiscal discipline, open trade, exchange rate flexibility and, in recent years, inflation targeting.  The IMF noted that the government’s proposal to introduce a royalty fee in the mining sector could raise revenue and aid Chile's management of its non-renewable resources.  However, officials cautioned that the introduction of a mining royalty fee should be done in a manner that does not negatively impact foreign investment.