People say: “things are looking down, so we'd better not spend,” so nobody spends, and it is this same public who, some time later, say: “I told you, things were looking down.” However, in this case, the loss of confidence has been definitely well-grounded on the relentless crisis the world is currently undergoing, but whose effects are being in turn worsened by this same loss of confidence. Confidence crises are hard to fight by using just traditional tools of economic policy. Confidence indicators of households and companies should bounce back up as months go by, as a result of sustainable and credible expansionary macroeconomic policies and objective communication about reality. In Chile, particularly, we are able to face this negative international scenario, thanks to our healthy economy and expansionary policies. BIS Review 41/2009  5  In our January monetary policy report (IPoM), we forecasted that, in the most probable scenario, the Chilean economy would grow between 2 and 3% this year. In such scenario, it was estimated that the GDP of our trade partners would grow 0.4%; however, after all the past months’ corrections, this figure is now estimated to have turned into a more than 1% decrease. As I said at the beginning, this is a major change of scenario, which will certainly affect the growth projections of our economy.
In short, this abundant liquidity, induced by an expansionary monetary policy and an increase in savings among emerging economies, particularly in Asia, has boosted a housing bubble. However, although it was a component of the imbalances which had built up before the outbreak of the crisis, it certainly was not the main cause; rather, such main cause is more related to the functioning of the financial system. That is, with the same path of monetary policy and global balances of savings and investment, an adequate risk assessment system could have averted the crisis or, at least, reduced its very large current scope. Evolution of inflation During most of 2008, concerns about the global economic scenario were split between how to tackle the first effects of the housing bubble burst, mainly affecting the developed world, and, how to deal with the significant increase in inflation. Since the beginning of this process, in the first half of 2007, we argued that its origin was related to factors which had nothing to do with the domestic business cycle, such as prices of food and fuels at international markets and adverse climatic conditions which favored major rises in the cost of electric power. During said year, prices of non perishable foods rose by 15% and prices of fruits and vegetables rose by over 30%, as compared to annual 2% average increases and 2% average decreases for both categories in the 2000-2006 period, respectively. Fuel prices rose by 15% in 2007.