Figure 6 Interest rates in pesos and dollars in the local market (percentage) 14  14  12  12  10  10  8  8  6  6  4  4  2  2  0  0  Jan.08  Apr.08  Jul.08  Oct.08  Stock Exchange-90 days  Jan.09  Apr.09  Jul.09  Oct.09  Libor + 90-day on-shore spread  Sources: Bloomberg and Central Bank of Chile. 8  BIS Review 145/2009  Table 1 Monetary policy rate and expectations according to EES (percentage) Actual level  Expected for Expected 2 same month months ahead  Expected for Dec.09  Oct. 2008  8.25  8.50  8.50  7.00  Dec. 2008  8.25  8.25  7.75  6.25  Feb. 2009  4.75  6.25  5.00  4.00  Nov. 2008  8.25  Jan. 2009  8.25  7.25  Mar. 2009  8.25  7.50  2.25  6.75  3.13  2.50  6.63 5.50  2.00  Source: Economic Expectations Survey (EES), Central Bank of Chile.
From a significant inflationary shock caused by the rise in oil and food prices to the effects of an unprecedented international financial crisis accompanied by a drop in output and a sharp reduction in inflation. Since mid-2007, the Chilean economy went through a process of significant increase in inflation, due to the sharp rise in commodity prices in world markets (figure 1). This rise was caused by supply and demand factors specific to those markets. Therefore, it was an adjustment of relative prices in foreign markets and not a generalized increase in domestic prices. The fact that it was an adjustment of relative prices made us not act with the strength that we would have if, for example, it had been a widespread increase in prices caused by a demand shock. In fact, the purpose of the increases in the monetary policy rate (MPR) applied in 2007 and early 2008 were to avoid the incubation of undesired second-round effects that  BIS Review 145/2009  1  might unreasonably prolong the inflationary impact of the shocks. Also, in that period we decided to begin a process of reserve accumulation consistent with the prevailing financial uncertainty and the evolution of the exchange rate. As from May of last year, the macroeconomic picture changed. Inflation rates began to show a fast and unexpected propagation of these shocks to other prices (figure 2). It could be argued that the Bank reacted too late.