Our assessment in our monetary policy reports during this year suggests that the strongest shock came from local demand. A recent analysis of micro data for non-volatile and nonfood goods inflation shows that the demand factors that have been affecting inflation have been retreating, in line with macroeconomic and consumption adjustment. Conversely, the cost factors that gained strength in recent quarters have begun to ease, although they persist at elevated levels. We can distinguish three periods. In the first part, between March and December 2020, Covid generated a supply shock that put upward pressure on prices, but at the same time, the drop in income and quarantines caused a drop in demand that acted in the opposite direction, neutralizing the effect. A second stage, during 2021, in which supply reactivates while demand pressures begin to grow strongly due to the withdrawal of pension savings and fiscal transfers, which amounted around 30% of GDP. Thus, in this period, demand pressures prevail strongly, feeding a huge imbalance in the economy and driving inflation upwards. 5  Finally, during this year, with already high inflation, we have had several shocks placed on top of an economy that was already seeking to contain inflation but had not yet managed to reverse the macroeconomic imbalances. First, the Ukrainian invasion by Russia, which massively raised food and energy prices globally. The second global development was the zero-Covid policy adopted by China’s authority, which disrupted global value chains and put downward pressure on copper prices.
As part of this process, in 2021 and in accordance with the definitions of the General Banking Law, a policy framework was published by the Central Bank to implement the Countercyclical Capital Requirement. The CCyB is the main macroprudential policy tool under BCCh authority, and BCCh-CMF coordination. As applied, the objective of this bank capital requirement is to increase banks’ resilience in the face of severe stress scenarios, resulting from systemic risks, thus contributing to reduce the impact of these events on financial stability, avoiding restricting essential banking services, such as credit supply, hence protecting the economy. The BCCh has so far not activated this requirement. As indicated in our latest Financial Stability Report, the banking system shows resilience, with contained risks and high levels of provisions, liquidity and capital that constitute sufficient buffers to withstand severe stress scenarios. Moving forward, it is necessary to advance in the coordination processes between the Central Bank, the CMF, and the Financial Stability Council to consolidate over time the implementation of these new tools within a framework of macroprudential regulation that follows international guidelines. 14  As we continue to observe the experience of jurisdictions that started the implementation of Basel standards before we did, we believe that the challenging last 3 years will provide extremely valuable information regarding the effectiveness of capital and liquidity measures implemented by Basel III and international standards.