Abstract
Chile has successfully resisted contagion from neighboring countries' difficulties. Chile's inflation targeting framework has successfully anchored inflation expectations and increased the economy's resilience to external shocks while maintaining price stability. The floating exchange rate regime is an essential part of the macroeconomic policy framework and continues to serve Chile well. The interest in recapitalizing the central bank is welcomed. Executive Directors commend Chile for the transparency of monetary and fiscal policies. Chile faces the essential task of returning to sustained economic growth and relatively low unemployment.
This statement updates information presented in the staff report. This additional information does not modify the thrust of the staff appraisal.
1. Recent economic information has been consistent with the staffs projections for output, inflation and the external accounts:
Economic activity. The latest monthly index of economic activity showed an increase of 2½ percent in May 2003 (year-on-year). For January-May 2003, this index was 3.2 percent higher than for the same period in 2002.
Unemployment. In the second quarter, the unemployment rate was steady at 8.6 percent seasonally-adjusted; employment was 3.9 percent higher (year-on-year).
Primary exports and imports. Upward revisions to the outlook for both copper export and oil import prices this year are expected to increase the values of exports and imports by broadly similar amounts. Exports and imports have shown steady growth in the first seven months of the year, increasing by 9.8 and 12.6 percent (year-over-year), respectively.
CPI Inflation. The 12-month inflation rate fell back to the middle of the target band in July, at 3.1 percent, the core inflation measure fell to 2.5 percent. Monthly inflation for the last four months has been zero or slightly negative, countering the sizable March increase of 1.2 percent.
2. Financial market conditions remain stable, with the most notable development being the strong advance of the stock market:
Stock market. The stock index is up almost 10 percent in the last month (more than 35 percent since end-2002).
Exchange rate. The nominal exchange rate remains steady, at about 700–710 pesos per dollar, where it has been for the last several months.
Country risk. The sovereign spread continues to be stable, at around 125 basis points.
Banking. A license to open a bank was granted to a large retail company. Retailers have recently entered the banking industry, aiming to capitalize on their experience with the consumer sector. Such entry is expected to increase banking competition.
3. Recent policy developments include the following:
Monetary policy. The central bank decided to maintain its policy interest rate at 2.75 percent at its August 12 meeting. The bank noted lower-than-expected economic growth in the second quarter, reflecting higher oil prices and regional factors that affected some manufactures. The bank continues to expect a pickup in the economic recovery in the second half of the year, supported by the current monetary policy stimulus and stronger growth in Asia and the United States.
Free trade agreement. The United States-Chile trade agreement was approved by the U.S. Congress on July 31, and Chile’s congress has begun reviewing it. The trade agreement is expected to be approved promptly and to take effect on January 1, 2004.
Labor market. As part of a government initiative to ensure the protection of workers’ rights, the administration submitted to the congress a law that would increase the number of labor courts, move compensation disputes to separate courts, and lower paperwork requirements. Despite these efforts, the Chilean Workers Union called a one-day nationwide strike (the first since 1986) for August 13 to protest the minimum wage and to demand equal input in the design of labor policies. However, workers’ participation in the strike seems to have been limited.