Eighty years of the Central Bank of Chile and how inflation was conquered in Chile The Central Bank of Chile was created in 1925 as an entity apart from the Executive Power. That year, also two laws related with the Bank’s startup were enacted: the Monetary Law and the General Banking Act. The former established a gold standard, while the latter created the Superintendency of Banks to supervise commercial banks. The Central Bank was granted the monopoly for printing bills, which under said Monetary Law would be gold convertible. But the foreign exchange regime and the Bank’s institutionality as set forth in 1925 weren’t strong enough to cope with the Great Depression with some success (it had enormous impact on the Chilean economy) and the growing demands for fiscal funding. These forced the abandonment of the gold standard, the imposition of foreign exchange controls, the creation of multiple exchange rates and the beginning of trade. Since the Great Depression – except for very short spans of relative macroeconomic stability –, the country suffered decades of high, volatile inflation. The ultimate cause of this was the systematic expansion of credit on the part of the Central Bank, both to state-owned organizations and to the private sector. Inflation followed inevitably and caused the failure of stabilization attempts in the years 1950 and 1960. The deterioration of the fiscal and monetary situation culminated in the early 1970s in a short hyperinflation.
Simultaneously, in 1999-2000, the Central Bank formalized the conduct of its monetary policy into monthly meetings, it increased its capacity for analysis and projections and enhanced the transparency of its policies through the publication of a four-monthly monetary policy report (with forecasts for inflation and growth) and the dissemination of communications and minutes of its monthly monetary policy meetings. It also adopted a target range for annual inflation, of 2% to 4%, centered in 3%, that would be in force indefinitely since 2001. The formalization of this inflation targeting scheme has continued in recent years, along with advances in the transparency of monetary policy. During the period 2001-2004, average annual inflation was 2.2%, and for the twelve months to September 2005 it rose to 3.9%, largely influenced by the recent oil price shock. In fact, core inflation rates are still below 3% per year. Today Chile has an IT regime in place that is proven and credible, and that includes a floating exchange rate within an increasingly deep market to provide coverage against foreign exchange risks. Also, its fiscal accounts are in order, the financial system is robust and fully integrated into the world’s capital markets. As a result, our country is more prepared than ever before to deal with external or internal shocks, and has the capacity to use a countercyclical monetary policy, which it has reinforced since the beginning of this decade. Hot topics for monetary policy under inflation targeting – in Chile and elsewhere A central bank’s tasks never end.