Chile's government on Friday announced a $1 billion package of measures to curb inflation running at 1994 highs and to boost slowing growth. The measures include a temporary reduction on tax on fuel, and cutting a tax on cheques and electronic transfers.
"This effort is part of the government's strategy to attack inflation with responsible fiscal policy," Finance Minister Andres Velasco told reporters in Santiago, recently. Chile imports nearly all of the fuel it consumes and was particularly hard hit by the surge in crude oil prices in the first half of the year.
Hydroelectric output was also hit by a severe drought earlier in the year, forcing Chile to rely on expensive-to-run diesel generators while restrictions of natural gas supplies from neighbouring Argentina compounded the energy squeeze.
The government reported a 1.1 percent rise in July's consumer price index, putting 12-month inflation at 9.5 percent, while June economic growth exceeded expectations at 5 percent year-on-year. The package comes as Chile prepares for municipal elections later this year seen as a dry-run for a presidential race in 2009 that analysts say could well see the ruling center-left coalition lose a near two-decade grip on power.
Chile's annual inflation rate ended 2007 at 7.8 percent, the highest in 12 years, after beginning the year at 2.6 percent. The central bank raised its target overnight lending rate by 50 basis points, as expected, to an almost 10-year high of 7.75 percent this month, the third such increase in as many months. It has said further increases in benchmark rates may be necessary to ensure inflation hits its target of 3 percent over a 12- to 24-month horizon.
The government last month lowered its forecast for growth in gross domestic product in 2008 to 4.2 percent from a previous estimate of 5.3 percent, amid higher inflation and lower output. The government forecasts a fiscal surplus at 6.7 percent of GDP in 2008, as well as 6.7 percent annual inflation for the year. It sees state spending growing 6.8 percent in 2008.