Historically, Chile has witnessed periods of inflation, stagnant growth, and recession when international events triggered a lowered demand for Chilean exports. Since Chile's economy has traditionally been heavily reliant on the export of natural resources, declines in demand have adverse effects on Chile because the amount of imports it needs to sustain its economy is not balanced against its exports.
Inflation in Chile has declined every year since 1990 when it stood at 27 percent. In 1996 inflation was 8.2 percent, and it fell to 6.1 percent in 1997. By 1999 inflation had dropped to 2.3 percent. Chile's overall economic
|Exchange rates: Chile|
|Chilean pesos per US$1|
|SOURCE: CIA World Factbook 2001 [ONLINE].|
performance during 1990-97 was very strong. During this period, financial authorities at the Central Bank focused on further reducing the inflation rate , adjusting short-term interest rates to achieve this objective, and maintaining strong public sector finances.
The independent Central Bank of Chile was granted autonomy by constitutional law in 1990. Its primary goal was to raise interest rates, when necessary, in order to bring down inflation. Although Chile suffered a slight recession in the 1998-99 period, blamed in part on the East Asian economic crisis, consumer demand started to grow and the economy began recovering in early 2000. Inflation had been on a gradual downturn prior to the recession. The recession further reduced it to about 2.6 percent at the end of 1999. However, although inflation might be low, recession stunts domestic economic growth and has adverse effects on unemployment and GDP.
The Central Bank manages the foreign exchange rate through incremental changes to account for periods of extreme capital inflows. In September 1999, the Central Bank moved to a freely floating exchange rate system that is determined largely by market forces. It had initially held an exchange-rate band along which incremental changes were made in response to economic indicators. After the change in exchange rate systems the Chilean peso devalued by 5 percent within 6 weeks before stabilizing and slightly recovering. The value of the peso versus the U.S. dollar fell about 18 percent in 1999 (473 pesos to the dollar in December 1998 to 547 in December 1999). With the Central Bank intervening minimally to stabilize the economy, the exchange rate should return to normal standards by the year 2001.