Monetary policy can respond, in either direction, to changes to the economic outlook as they unfold to ensure a sustainable return of inflation to the 2% target. Since early November, the sterling exchange rate is up around 6% and market interest rates in three years’ time are up around 30 basis points. Long-term interest rates are back to their pre-referendum levels. Markets also responded strongly to the US election result, with both breakeven inflation and real yields rising. Alongside those market developments, UK indicators suggest continued solid growth, and the pace of fiscal consolidation is now expected to be slower. The MPC will assess these and other developments at its meeting next week as it plots the monetary course ahead. Whatever economic developments and prospects, the MPC will always set monetary policy to maintain price stability and promote the good of the people of the United Kingdom. As it did when it was the only game in town after the global financial crisis; and as it will going forward, in better balance with fiscal and structural policies. Monetary policy will continue its good work as the UK economy adjusts to new opportunities with Europe and the rest of the world. In the end, monetary policy isn’t a spectre but a friendly ghost. 18  All speeches are available online at www.bankofengland.co.uk/publications/Pages/speeches/default.aspx  18  i  Monetarism is the view that the dynamics of money have a temporary influence on demand and, via the celebrated “quantity equation”, a major influence of prices.
14  Figure 11 Structural decomposition of 10-year zero rate (*) (basis points, accumulated since 1 July 2019)  5 4  Growth Risk premium Total  Monetary Policy External  3 2 1 0 -1 -2 Jul.19  Jan.20  Jul.20  Jan.21  Jul.21  Jan.22  Jul.22  (*) Historical decomposition of the long rate from a BVAR based on the identification strategy proposed by Eterovic and Eterovic (2022), incorporating an external bloc. The exogenous bloc encompasses all U.S. shocks (monetary policy, growth, risk aversion and pure risk), which have been aggregated for simplicity. Source: Central Bank of Chile based on RiskAmerica data. 15  Figure 12 Trend growth trajectory (percent)  5 4 3 2 1 0 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 Source: Central Bank of Chile. Figure 13 Inflation forecast (1) CPI inflation (annual change, percent)  14  Core inflation (2) (annual change, percent)  CPI  12  MP Report Sep.22 MP Report Dic.22  10  8  14  Core CPI  12  MP Report Sep.22 MP Report Dec.22  10  8  6  6  4  4  2  2  0  0 19  20  21  22  23  24  19  (1) Gray area, as from fourth quarter of 2022, shows forecast. (2) CPI without volatiles Sources: Central Bank of Chile and National Statistics Institute (INE).