1. This statement reports on economic and policy developments in Chile since the Staff Report was issued on June 19. The thrust of the staff appraisal remains unchanged.
2. Recent data are consistent with staff forecasts of below-trend growth in 2008. Year on-year growth of economic activity slowed to 2.1 percent in May, and the unemployment rate rose from 7½ to 7¾ percent. On the other hand, the outlook for copper prices has improved in recent weeks, implying a slight upside risk to staff forecasts for the fiscal and current account surpluses.
3. Inflation remains high. The consumer price index rose by 9½ percent in the year to May, and the index excluding food and energy items by 8¾ percent. One-year-forward inflation expectations have risen above 5 percent, and both market and survey-based longer-term expectations have moved into the upper range of the central bank’s 2–4 percent comfort zone. On July 2, Governor De Gregorio stated that the return of inflation to target could take longer than initially projected by the central bank, but that the bank would take all necessary measures to ensure convergence over the two-year policy horizon. Staff will provide an oral update on the outcome of the July 10 Monetary Policy Meeting.
4. The peso has depreciated markedly over the past few weeks, returning to a level broadly consistent with underlying fundamentals. Amid rising oil prices and slowing growth, the peso has lost about 7 percent against the U.S. dollar since the Staff Report was finalized (18 percent since its April high), and also fell vis-à-vis the euro and most regional currencies. Updated staff calculations show that—in real effective terms—the peso is now close to its equilibrium value, matching the CGER’s “about zero” assessment.
5. The central bank has continued its purchases of US$50 million in daily auctions since late April. Governor De Gregorio recently noted that risks for emerging market economies emanating from adverse global financial developments—the key factor leading to the bank’s decision to increase holdings of international reserves—remain in place.
6. Congress approved the injection of US$1 billion into the government’s fuel stabilization fund. The first of two equal tranches has already been transferred and will help smooth the impact of higher oil prices on inflation over the next few months, including on consumer products such as heating oil and liquefied gas. The government committed to a review of the fuel tax structure and plans to request Fund technical assistance on this issue.
7. The government on June 18, 2008 increased the minimum wage by 10.4 percent. In real terms, the increase is likely to be close to the increase in the average wage over the past few years. Changes in the minimum wage are not considered to have a large impact on inflation. Nominal growth in salaries has continued to keep pace with actual inflation.