Indeed, in mitigating inflationary pressures, an exchange rate appreciation restrains the MPR adjustments that could result from only the closing of the output gap. One working assumption we use in our projections is that the real exchange rate will change little into the long term. Any movements away from its trend are possible in a floating regime. Its potential financial effects on aggregate output and inflation will be definitely considered by the Board as an input for its future decisions. As we have demonstrated in the past, our monetary policy is highly flexible. It has contributed enormously to the good standing the Chilean economy enjoys today, in an environment of stable prices and restored employment and output. Now I will review the main features of the macroeconomic conditions we believe are the most likely for the next two years and its implications for inflation and monetary policy. Macroeconomic scenario The first closing of second-quarter National Accounts showed GDP growth at 6.5% y-o-y. In terms of velocity, the second quarter ended with an annualized quarterly variation of around 20% (figure 3). Domestic demand also grew above forecasts, driven by increased private consumption and a strong rebound of investment. Such dynamism has responded to not only temporary factors but also to more persistent ones. Among the temporary factors, what stands out is the immediate repair of the damages caused by the catastrophe of 27-F and the reversal of the dramatic contraction of domestic demand during 2009, associated to the then high levels of uncertainty.
The different surveys and asset prices can be read in more than a way in regards the true pace of normalization. Actually, the same as in June, the MPR implicit in swap contracts is lower than the one that can be inferred from the forward curve, mainly reflecting significant differences between the rates on non-indexed Central Bank bonds and swap contract as equivalent maturities. It is possible that these differences originate in the type of institutions operating in each market, which are not fully integrated, reflecting different preferences for instruments in pesos and in UF by resident and non-resident institutions. Similarly, this partial integration may mean that swap contract rates reflected more quickly and more intensely the movements of risk-free interest rates abroad. The baseline scenario of this Report uses as a working assumption an MPR trend that is comparable to the one observed in various expectations surveys (figure 11). Certainly, if actual conditions differ from those assumed in this baseline scenario, alternative policy measures will be required. Specifically, the Board believes that the scenario outlined here is subject to a number of risks. Considering that in June domestic demand – and output – already was showing faster than foreseen velocity, we cannot rule out gaps closing faster than assumed in the baseline scenario. Nor can we rule out that some part of that strength responded to merely temporary factors, such as the earthquake, and output will slow down before we think. In the global context, several risks are still latent.