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, 1 July 2013. *  *  *  The Monetary Policy Report of June 2013 and the Financial Stability Report of the first half of 2013 can be found at http://www.bcentral.cl. Introduction Mr. President of the Senate’s Finance Commission, Senator Andrés Zaldívar, senators members of this Commission, ladies and gentlemen, I appreciate your invitation to present our Board’s vision on recent macroeconomic and financial developments, their prospects and implications for monetary and financial policy. This vision is contained in detail in our Monetary Policy Report of June 2013 and our Financial Stability Report of the first half of 2013. The macroeconomic scenario facing the Chilean economy has undergone significant changes in recent months. Output and demand decelerated and, although some moderation in their growth rates was expected and desirable, the first quarter brought a sharper adjustment than had been anticipated. On the external front, there have been significant developments in the composition of global growth, the trajectory of commodity prices and the evolution of global financial markets. From a medium-term perspective, recent developments point to a healthy normalization of the unusual international conditions that have prevailed for some years now, and their effects on our local economy.
However, we cannot rule out that more serious events can occur with more severe and longer-lasting effects on global markets, in light of their renewed political difficulties to implement fundamental structural reforms, and where the banking sectors are still dealing with deteriorating portfolios due to slow economic activity. Another risk coming from abroad has to do with how the conventional and unconventional measures of monetary stimulus will ultimately be withdrawn in the United States. Having no history in this creates uncertainty in the markets, mainly about the financial effects it might have. There may be an overreaction of the markets, with increased stress and sharp rises in long-term interest rates. The rising cost of financing this would entail for emerging markets and some Eurozone economies more dependent on external financing, would pose important policy challenges for them. In Chile, this could lead to increases in both the cost of external financing of companies and banks and higher long-term interest rates domestically. As emphasized in our Financial Stability Report, it is important for banks in this context to keep the exposure of their balance sheets at bay. In any case, the U.S. monetary authorities have argued that if confronted with an unwanted reaction the process could be delayed or even reversed to some extent, so it is possible for the effects of the withdrawal to be fairly limited.