However, I think a sensible way to address signs of severe misalignments, beyond the leaning against the wind with monetary policy, is through sterilized intervention. But, in order for this to be effective and coherent with the inflation targeting framework, some conditions must be met: •  In the first place, it must be consistent with the inflation target, in order for the intervention not to jeopardize the credibility of monetary policy. •  Secondly, to safeguard monetary policy independence, once the intervention is announced, it must be implemented mechanically. All this shields the conduct of monetary policy, typically carried out in regular pre-established meetings, from the extraordinary decision of buying or not buying foreign currency. In particular, the sterilization of intervention decisions permits to preserve both the credibility and the independent management of monetary policy. •  Finally, and because of this sterilization requisite, the cost of intervention must be properly considered, because it entails a quasi-fiscal component that could be significant. The Chilean experience last year was in line with the aforesaid principles. It was done in a moment where there was clear evidence of misalignment with respect to the levels deemed consistent with long-term fundamentals. It was also totally consistent with the inflation objective, and started at a moment – April 2008 – in which there were rather benign inflation figures that revealed a smaller risk of unwanted inflationary propagation.
Lending standards have certainly tightened, but the Chilean economy is far from suffering the problems that other countries are facing. Accordingly, the inflation outlook changed significantly, while monetary policy reacted with a change that was large in magnitude and swift in implementation. October 2008 was the month where y-o-y inflation peaked. November brought some relief, largely determined by the drop in fuel prices in world markets. By then, no break in the inflationary trend was foreseen. Nonetheless, given the weakening outlook for activity and inflation, the Central Bank not only did not raise the MPR – which was the most likely path of monetary policy as discussed in September’s Monetary Policy Report presented to Congress – but also communicated that the most likely course of action would be an easing of policy by early 2009. In January 2009, with a clearer assessment of the reduced inflationary pressures, the MPR was lowered by 100 basis points. Later, with the evidence of alleviated inflationary pressures and drastic increases in downward risks to growth and inflation, the Central Bank decided to cut the MPR by 250 basis points at both its meetings of February and March. The monetary easing process continued and completed 775 basis points in seven monthly meetings, bringing the MPR to 0.50%, the minimum level deemed adequate for a normal functioning of money markets.