At home, the main risk has to do with the evolution of inflation, mainly because of the unrelenting exchange rate depreciation and its accumulated effects on costs. This, in a context of margins that seem to have narrowed because of the high annual growth in nominal wages and the limited pass-through of lower fuel prices in some sectors. Therefore, the materialization of an external risk scenario that triggers a significant additional depreciation of the peso may have substantial effects on the short-term inflation outlook, which will depend on the state of the business cycle. On the other hand, it is also possible that, despite a recent improvement in domestic expenditure and output compared with previous quarters, private expectations will not improve sufficiently to stimulate further spending, especially in investment. Conversely, a scenario where expectations recover more strongly than expected would allow for more dynamic economic activity. The same can happen if the increase in national income has greater effects on expenditure in a context of more comfortable external accounts. After evaluating these risks, we estimate that, although local risks have moderated, the risk balance is still downward biased for output, while the risk balance for inflation is unbiased. Let me share with you some final thoughts now. 4  BIS central bankers’ speeches  Final thoughts Lately, the Chilean economy has responded to the big changes in the local and external environment, by making a major adjustment.
the CPI excluding foodstuffs and energy, CPIEFE, from 4.3 to 4.7 percent annually between November and February. However, the lower oil price in international markets and its pass-through to domestic prices helped to moderate annual growth in CPI inflation, which went from 5.5 percent in November to 4.4 percent in February (figure 1). Recent inflation figures have taken the market by surprise, as it had assumed a clearly downward position with respect to the behavior of prices, even below our predictions in the December Report. Thus, the market expectation for inflation at the end of 2015 has been revised to somewhat above 3 percent, as has been inflation one year out. Expectations two years out remain anchored in 3 percent (figure 2). On the contrary, output and expenditure have evolved as forecast in December. Again this time the baseline scenario I will be sharing with you in a moment foresees a gradual recovery that will gain strength towards the second half of this year. Consistently with this scenario and the Board’s statement, market expectations for the monetary policy rate (MPR) have ruled out new cuts and, in some cases, point at a cycle of increases beginning late this year. In what follows I will describe the macroeconomic scenario we believe to be the most likely for the coming quarters, and its associated risks. Macroeconomic scenario The external environment and related risks remain largely determined by the impending monetary normalization process in the United States.