José De Gregorio: Chile’s latest Monetary Policy Report Presentation by Mr José De Gregorio, Governor of the Central Bank of Chile, of the Monetary Policy Report before the Honorable Senate of the Republic, Santiago de Chile, 7 September 2011. *  *  *  The Monetary Policy Report of September 2011 can be found at http://www.bcentral.cl. Introduction Mr. President of the Senate, Senator Guido Girardi, Senators: I am grateful for your invitation to the Board of the Central Bank of Chile to present our Monetary Policy Report. As in September of every year, this presentation coincides with the Central Bank Board’s yearly account to the Senate, where we share with you our vision regarding recent macroeconomic and financial developments in Chile, as well as their prospects and implications on monetary policy conduct. At the time of presenting this Report, we are about to complete three years since the outbreak of one of the worst economic and financial crises in modern history, known as the Great Recession. The string of events that followed the collapse of Lehman Brothers drove the world to an unprecedented confidence crisis, with a drop in global output that has no comparison with any other episode over the last eighty years. Chile was able to mitigate the adverse effects of the crisis, and succeeded in quickly recovering its levels of output and employment, in sharp contrast with what happened in developed economies (figure 1).
Also, it is foreseen that the weakening of the developed world will have an impact on emerging economies which, in any case, will continue to outperform their developed counterparts. This projected world growth forecast is lower than consensus, which at the closing of this Report probably does not reflect the full effect of current financial turmoil. Nonetheless, incoming reports by investment banks do carry significant downward corrections for these developed economies, in line with the assumptions that make up our baseline scenario. As I said, concerns about an overheating of the emerging world and its consequences on inflation have subsided. Adjustments already made to the monetary policies of several economies, the weakening of the global economy, and the recent drop in commodity prices are behind this assessment. So, several countries have already suspended their cycles of policy rate increases and, in general, market expectations have adjusted to expect a flattened rate. In the developed economies, it is most likely that monetary policy will hold on to – or possibly even intensify – its current degree of expansiveness for some time. The Federal Reserve has just announced its intention to keep the fed funds rate at a minimum at least through mid-2013 (figure 11). All these facts combined will result in that the external impulse that the Chilean economy will be receiving over the coming quarters will be milder than previously estimated. On one hand, the worsened global performance will have a negative impact on our trading partners’ economies.