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.
Developed countries must make costly, complex, yet unavoidable adjustments. The experience of the developed world confirms the need to safeguard macroeconomic balances, both public and private, as well as a strong, well regulated financial system. The fragility of financial systems and fiscal accounts of some developed economies have caused a recoiling of living standards and could compromise their growth ability for a long while. 6  BIS central bankers’ speeches  Figure 1 Gross domestic product  (index, IV.2007=100, quarterly series) 115  115  110  110  105  105  100  100  95  95  90  90  IV.07  IV.08 Chile  IV.09 U.S.  Eurozone  IV.10 U.K.  Sources: Central Bank of Chile and Bloomberg. Figure 2 Real exchange rates around the world (index, July 1994-July 2011 average = 100)  180  160  160  140  140  120  120  100  100  80  80  60  60 Russia Brazil Czech Rep. Australia Hungary Canada Indonesia Switzerland N. Zealand Poland India Philippines Turkey China Chile Thailand South Africa Israel Norway Mexico Peru Malaysia Eurozone Japan South Korea Sweden U.S. U.K.  180  Range (*)  Spot  Average  (*) The range shows peaks and troughs of the local currency during indicated period. The scale has been adjusted to 180. The peak value for this country was 225. Sources: Central Bank of Chile and Bank for International Settlements (BIS).