While recognizing that overreactions can occur in the short term in either direction that could warrant such an intervention, we need to be aware that it entails carry costs for the Central Bank and affects the overall economy. Focusing on keeping inflation near the target and preserving the flexibility of the exchange rate in times of bonanza allows the peso to accommodate conditions like the present ones and adjust more efficiently to the new situation. We also know that exchange rate flexibility plays a critical role in preventing currency mismatches, which have taken such a great toll elsewhere in the region and in Chile in the past. Overall, the appreciation of the peso that we saw a few months back was milder than that of other currencies, so now the depreciation has not been as sharp either. Domestically, monetary policy has continued to face many short-term challenges. The sound economic slowdown we were expecting has been gradually occurring. On the expenditure side, however, consumption continues to be very strong, boosted by labor market conditions. Actually, the latest indicators confirm the strength of the labor market. The information we have reviewed for this Report suggests that this component of domestic demand will moderate in the coming quarters, but we must not overlook the risk of a slower than expected adjustment of consumption, affecting the use of domestic resources and the deficit of the current account of the balance of payments.
The baseline scenario reflects the slowdown in output that has been occurring during the year. It also assumes that investment will moderate further as the investment cycle is completed, consistently with adjustments seen in business surveys and investment plans. Consumption is expected to slow gradually because of the still strong labor market and the relative stability of household saving during the expansionary phase of the cycle. Consumer expectations are less optimistic these past few months and are approaching neutrality, which will help moderate this component of expenditure. So will the slower pace of marginal job creation, particularly salaried work, and the slowdown of real wages. Coupled with this is the depreciation of the real exchange rate which will affect durable consumption. Also, moderating investment will help to take pressure off the labor market. Finally, there is the foreseen reduction in the impulse from abroad (table 2). Inflation is expected to continue to grow steadily to reach 3% during the first half of 2014 and and be stable until the end of the projection horizon, this time the third quarter of 2015. The CPIEFE will take somewhat longer to hit 3%. The underlying assumption is that nominal wages will rise in line with productivity and the inflation target. There is also the methodological assumption that the RER will remain near its recent values. Finally, the baseline scenario uses as a working assumption that the MPR will follow a path similar to the one implicit in expectations surveys available at the closing of this Report (figure 5).