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, 6 June 2016. *  *  *  Both the Monetary Policy Report of June 2016 and the Financial Stability Report of the first half of 2016 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, Thank you for your invitation to present the Central Bank of Chile’s vision on the recent macroeconomic and financial developments, prospects and implications for monetary and financial policy making. This vision is contained in detail in our Monetary Policy Report of June 2016 and our Financial Stability Report of the first half 2016. Over the last few months, the economy evolved in line with estimates in our March Report. Inflation declined to 4.2 percent annually and our new baseline projections – which I will share with you in a moment – indicate that it will return to the tolerance range within a few months. On economic activity, first-quarter GDP growth outperformed our March forecast. However, this year’s outlook foresees that it will remain below potential still for some quarters.
The aggregate financial burden stands at 15 percent of the sector’s disposable income (figure 15). Although non-performing indicators for bank consumer credits remain low, lately there has been some increase in the case of smaller amount loans. Here the risk arises of a more drastic deterioration of the labor market that could hinder the households’ repayment capacity. Any developments on this front will need to be closely monitored over the coming quarters. As for the banks’ lending activity, it is evolving in line with the state of the business cycle. Real growth in commercial loans is in line with lower demand for credit by firms, consistently  BIS central bankers’ speeches  5  with the reduction in investment and the results of our Bank Lending Survey. Consumer credit growth recovered slightly and mortgage loans are still growing strongly, around 10 percent in real annual terms. Thus, the real annual growth rate of total banking credit is around 5 percent. At the same time, aggregate default indicators are stable, despite some deterioration in commercial loans. As we pointed out in the last Financial Stability Report, our banking system’s capitalization levels have decreased in recent years. At the closing of 2015, the capital adequacy ratio (CAR) was 12.6 percent. Although the announced capitalizations and accounting changes will push this indicator slightly above 13 percent, a declining dynamic has been observed in the past five years. This contrasts with the international trend, where banks have increased capitalization in several jurisdictions.