Economy & Business - August 2007 (ISSN 1741-4431)

The central bank said that it had taken the decision because the inflation projections for the next two years were running at over the target of 3%. The consensus among independent economists is that the inflation rate in 2007 will be 4.8%, though some reckon that the rate could go as high as 6%.

The central bank took its decision just before the mid-August madness on the financial markets, which culminated in the surprise decision on 17 August by the US Federal Reserve Board to cut its discount rate. The Chilean central bank said that, despite the more restrictive credit conditions (which forced the Fed's action) the outlook for the international economy was promising. Chile suffers when oil prices are high, because it imports 90% of its fuel but it benefits from high copper and cellulose prices.

The central bank's big worry is the run-up in food prices. It claimed that these rises would be transitory. The main reason for the run-up in food prices has been the unusually severe winter. The bank warned that it was likely to tighten monetary policy further at its next meetings, until the projected inflation rate came down towards the target. The bank raised rates, for the first time in 2007, also by 0.25%, at its July meeting.

The bank also noted that the domestic economy was growing strongly. Some economists doubt that there is now much spare capacity left in the economy. The finance minister, Andrés Velasco, expects the economy to grow by 5.8% in 2007. In 2006 the economy grew by 4%, the slowest rate since 2003. The official growth rate for the first quarter is 5.8%.

Vittorio Corbo, the president of the central bank, is forecasting growth of at least 6% in 2007. In May, Corbo had forecast a rate of between 5% and 6%.

In June the rate of year-on-year growth was 6.1%. Industrial output in June jumped by 6.7%, year-on-year. This was the biggest year-on-year jump for 13 months.

One result of the strong growth is falling unemployment. This was down to 6.9% in the second quarter. In the second quarter of 2006 the rate had been 8.9%. The industries with the strongest growth are wood pulp and food.

One sign of the strength of domestic demand is the increase in sales of new vehicles. In the first seven months to 2007, these were up by 12.6%, year-on-year, at 121,013. In cash terms, sales were up by 14% at US$2.07bn, according to the Asociación Nacional Automotriz de Chile (ANAC).

The rise in interest rates in July did nothing to halt the rise in vehicle sales. Indeed, in July sales were up by 17% on the same month of 2006 at 17,123.

Exports: In July exports were US$6.17bn up from US$5.6bn in June. Imports were up from US$2.9bn in June to US$3.74bn.

Pension funds: Private pension funds stood at US$102.1bn at the end of July, This is 24% up in 12 months. Of this US$33.4bn is invested outside Chile, mostly in equities. Inside Chile around US$29bn is in money market deposits and government paper. The rest is in equities.

Inflation: In July the rate was 1.1% up from June's 0.9%. This brought the rate for the past 12 months to 3.8%. The rate for calendar 2006 was 2.6%.

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