MONETARY POLICY REPORT PRESENTATION BEFORE THE FINANCE COMMISSION OF THE HONORABLE SENATE OF THE REPUBLIC  Mario Marcel Governor Central Bank of Chile 10 June 2019   The June 2019 Monetary Policy Report can be found on http://www.bcentral.cl. I. Introduction  Mr President of the Senate’s Finance Commission, senator Ricardo Lagos-Weber, Senators members of this Commission, ladies, gentlemen, I am grateful for your invitation to present the vision of the Board of the Central Bank of Chile on recent macroeconomic developments, outlook and monetary policy implications. This vision is detailed in our June 2019 Monetary Policy Report released this morning. Its contents also provide the background for the decision adopted by the Board in its monetary policy meeting of last Friday. There we decided unanimously to reduce the Monetary Policy Rate (MPR) by 50 basis points, taking it to 2.5%. Key in this decision was our evaluation that the monetary policy had to be recalibrated, because the delivered impulse was not enough to ensure the timely convergence of inflation to the 3% target in light of the new CPI figures and the new estimates for the activity gap and the neutral monetary policy rate. The vision that the macroeconomic scenario could need a different monetary impulse began to be forged in the March Monetary Policy Report, when the measurement of inflation with the new Consumer Price Index (CPI) showed us an increase in prices significantly smaller tan with the previous figures, postponing for about a year its convergence to the 3% target.
In this judgment, the initial fall in productivity is combined with Page 3 of 18  the increase in the labor force and the expected lags in the adequacy of the capital stock in response to this phenomenon. The updating of potential growth, together with the performance of the economy in the first quarter, drive the activity gap level (-0.7 percentage points) to be wider than previously considered (Figure 6). It is important to note that, with respect to last December, the estimated level of the activity gap is greater in the beginning—the first quarter of 2019—, but also throughout the projection horizon. Although first-quarter activity figures play a role in the former, in the latter the fundamental factor is the potential growth update. The baseline scenario assumes that the gap will gradually close along the projection horizon, although at a slower pace than previously expected due to the magnitude of the adaptation process that the economy will have to go through in the face of the migratory shock. II.5. The neutral MPR About the neutral policy rate, I think a couple of conceptual clarifications are in order. The neutral MPR is defined as the rate that is consistent with a GDP in its equilibrium (trend) level and an inflation rate in the 3% target. All this, once the effects of transitory shocks in the economy have dissipated.