In terms of output, third quarter data showed a marked slowdown that continued into the beginning of the fourth quarter, but which has tended to dissipate according to incoming information. The most recent data show that this deceleration has continued, albeit at a slower pace than forecast. Likewise, as regards financial conditions, after a shift towards a tighter situation at the end of last year, more recently we have returned to a more normal situation. In particular, the monetary market frictions that occurred in late 2011 were quickly overcome after the Central Bank adopted transitory measures to provide greater liquidity. To go into more detail regarding Chile’s current economic situation, allow me to provide some background on the challenges we face in light of last year’s economic developments in our country. BIS central bankers’ speeches  1  The Chilean economy in 2011 In early 2011, several emerging economies, among them Chile, experienced an increase in inflationary pressures due to an episode of rises in international prices of commodities, particularly oil and some foodstuffs. Additionally, in Chile domestic demand, output and employment recovered quickly, helping close output and labor market gaps. Likewise, in the face of rising prices of oil and foodstuffs, the private sector’s inflation expectations rebounded, reflecting a greater risk of inflation. Core inflation measures remained at reasonable levels, below the minimum level of the target range. In this setting, the Central Bank Board decided to speed up the normalization of monetary policy during the first half of the year.
We have taken the view that such fine-tuning is an unnecessary complication at this stage. If the MPC want to undertake further purchases, it would be straightforward to simply buy more gilts financed by issuing commercial bank reserves. 10  It was important that the gilts were not lent against cash, as that would have undone some of the intended impact of the initial asset purchases. 11  The 3 month commercial paper purchased had nearly all matured by the end of the programme, and had already been largely replaced by additional gilt purchases. 12  The cumulated dividends are not the profits on the portfolio, even before funding costs. Depending on such factors as the yield curves at the date of issue and purchase, and the maturity of the gilts; the dividends and market prices of the gilts are connected. See the DMO website for more information on changes in gilt prices: http://www.dmo.gov.uk/documentview.aspx?docname=publications/investorsguides/pig201204.pdf&page=in vestor_guide/Guide. 4  BIS Review 135/2010  Eventual exit strategy At this time, it is not clear whether the next step with the asset purchase programme is most likely to be to sell the assets back or to buy more. The Bank is prepared for either but it might be particularly helpful to set out in advance a few thoughts on the eventual exit strategy. After purchasing £ of assets in just under a year, the MPC paused its programme of asset purchases in February 2010.