Although output is estimated to have contracted in the third quarter of this year, there is a range of evidence from business surveys, from the Bank’s regional Agents, and from recent indicators that the economy has begun to stabilise and that we are likely to be moving into a period of renewed expansion. Whenever an economy is in recession, especially a recession as deep as this one, it can be hard to see where growth will eventually come from. However, as I have discussed, the easing in monetary and fiscal policy is providing considerable support to the emerging recovery. That stimulus is reinforced by the substantial depreciation of sterling. Sterling is around a quarter below its mid-2007 level and – as many of you here today will know from your own experiences – this has helped to improve the ability of UK companies to compete in both overseas and domestic markets. Output will also receive a further fillip as the adjustment of inventories by companies runs it course. However, the on-going structural adjustments that I mentioned are likely to give rise to a number of economic headwinds that may impede the recovery. Credit conditions are likely to remain tight for some time as banks repair their balance sheets. And the need for public and household finances to adjust to the changed economic environment will weigh on spending. Balancing these factors, my view of the outlook for GDP growth is in line with the projections contained in the Bank’s Inflation Report published last month.
4  Commodity cycles may be linked to global business and financial cycles at critical junctures, but commodity long cycles are more related to technological progress, changes in the composition of demand, and global trade patterns (see Figure 2). 20 15 10 5 0 -5 -10 -15 -20 -25 -30 1980  Figure 2: Commodity super cycles and global conditions (†)  1985  1990  1995  2000  2005  2010  2015  40 30 20 10 0 -10 -20 -30 -40 -50 -60  EMEs Business Cycle AEs Business Cycle VIX (inverse, standardized, 10x) Comm. PX Cycle (excl. Fuel) [RHS] (†) Business and commodity prices based on HP filter. Source: Central Bank of Chile based on IMF and FRED databases. The experience of Chile since 2000 Chile has been traditionally exposed to global cycles, speeded-up growth in the mid-1980s, once a major financial crisis led to a major upgrade in financial regulations. This bonanza period was halted by the Asian Crisis in mid-1997. The Central Bank tried to sustain the Chilean currency, by then under crawling bands, in the middle of a substantial external shock. This led the Central Bank to raise the interest rate to 14%, by then a real interest rate. Thus, the financial system face overnight rates of nearly 100%. The Chilean economy enters into a recession in late 1998. Floating ER was added to forward-looking inflation targeting, and then complemented by a Structural Balance-based fiscal policy in the early 2000s.