Rodrigo Vergara: The Monetary Policy Report and the Financial Stability Report Presentation by Mr Rodrigo Vergara, Governor of the Central Bank of Chile, before the Finance Commission of the Honorable Senate of the Republic, Santiago de Chile, 15 December 2014. *  *  *  The Monetary Policy Report of December 2014 and the Financial Stability Report of the second half of 2014 can be accessed at http://www.bcentral.cl. Introduction Mr. President of the Finance Commission of the Senate, Senator Ricardo Lagos, senators members of this Commission, ladies, gentlemen. Thank you for inviting me to present Central Bank of Chile’s financial and macroeconomic outlook and its view on the most recent developments and their implications for monetary and financial policy. This vision is contained in detail in our December 2014 Monetary Policy Report (IPoM) and our Financial Stability Report (IEF) of the second half of 2014. In recent months, our macroeconomic outlook has reflected unexpectedly high inflation and a slowdown in economic growth. In the projection scenario that I will be presenting shortly, we have revised upward our inflation forecast for the coming months, although we continue to estimate that it will converge to 3 percent during 2015. We have also revised downward our growth forecast for domestic output and demand this and next year. There are several factors underlying these corrections. The inflation surprises of the past few months originated in specific prices and were mostly temporary.
Short-term fluctuations in the krone tend to have very limited effects on economic developments, while long-lasting changes may have an impact. Norges Bank has mainly based projections in the baseline scenario in its inflation reports on a constant exchange rate equal to the average for the previous three months, and in some cases the average for the previous month. Using these averages, very short-term variations in the krone exchange rate will have less effect on the exchange rate assumption. A more long-lasting change in the krone exchange rate will, on the other hand, be taken into account over time and will gradually have an effect on the inflation projection and on interest rate setting. Norges Bank’s Executive Board sets the interest rate with a view to achieving the inflation target of 2½ per cent. The inflation target also provides a framework for stabilising output and employment. When setting the interest rate, the Executive Board seeks to strike a balance. On the one hand is the consideration of bringing inflation up to target and stimulating growth in the Norwegian economy. On the other hand, we must consider the risk of new pressures in the Norwegian economy when looking further ahead. Since December 2002, we have found it appropriate to reduce the interest rate to a low level. At the last monetary policy meeting on 17 September, it was decided to reduce the interest rate to 2.5 per cent.