Rodrigo Vergara: Chile’s March 2016 Monetary Policy Report Presentation by Mr Rodrigo Vergara, Governor of the Central Bank of Chile, of the Monetary Policy Report before the Finance Committee of the Honorable Senate of the Republic, Santiago de Chile, 28 March 2016. *  *  *  Accompanying figures and tables can be found at the end of the speech. Introduction Mr. President of the Senate’s Finance Commission, senator Andrés Zaldívar; senators members of this Commission, ladies and gentlemen, Thank you for your invitation to present the vision of the Board of the Central Bank of Chile on recent macroeconomic developments, its outlook and implications for monetary policy. This vision is contained in detail in our Monetary Policy Report of March 2016. Since our last Report saw the light December of last year, inflation has behaved as forecast. It has remained high, mainly due to the effects of the significant depreciation the peso has accumulated, in a context where indexation to past inflation and narrow capacity gaps have limited the decline of non-tradable inflation. Regarding activity, 2015 figures showed weaker demand and slower than expected growth towards the end of the year. As I will describe in a moment, this factor, along with an expected weakening of the external scenario, results in reduced growth prospects for this year. In our projection scenario, inflation is assumed to be slightly lower than we thought in December.
I do not see this as inconsistent with inflation targeting because it is the stability of inflation over long periods, not year to year changes, which is crucial to economic success. The key principles underlying flexible inflation targeting are credibility, predictability and transparency of decision-taking, and they will remain the cornerstone of successful monetary policy in the future. Conclusions Governor Leigh Pemberton’s 1992 lecture concluded with a message for the LSE: “in a world of price stability you might not think of inviting the Governor of the Bank of England to address you”. Had price stability guaranteed financial stability, and had I achieved my long-held ambition of being boring, that might have been true. Unfortunately, it is not how things have worked out! What I have tried to show tonight is that the case for price stability is as strong today as it was twenty years ago – both in theory and in practice. The clarity and simplicity of the inflation target helps to anchor inflation expectations on the target. We forget the lessons of the 1970s and 1980s at our peril. In the end, the essence of central banking is to maintain confidence in, and the value of, paper money. It is far too soon to bury inflation targeting. Together with central bank independence, it played a key role in bringing price stability to the UK.