Moreover, we can see today that the application of monetary easing is also reaching lending rates (Becerra et al., 2009), and this should still be so after last week's drop (Figure 5). Less output in Chile As I have already mentioned, a lower output level bears important consequences on the inflationary outlook. To understand this, it is useful to define three distinct factors: •  The domestic business cycle. •  Real and financial impacts of the international crisis. •  Global confidence crisis. I would like to refer to each of these three factors: (i)  The domestic business cycle  Domestic demand has grown rapidly in the past few years. This did not translate completely into a higher output level, since part of it diverged towards imported goods. During the 20042007 period, the average annual growth rate of domestic demand was 8.1%, i.e., 2.9 percentage points over output. During this same period, average annual growth in private consumption was 7.2%. Investment grew by a 12.1% annual average, thereby doubling the growth of output, and this resulted in the highest ever investment rates in our history. This process had to tone down necessarily, as it gradually occurred during 2008 (Figure 6). A certain degree of bunching of individual decisions on consumption and investment is usually seen, particularly when these have risen in response to common financial and global conditions. Something similar should happen in periods of weaknesses.
This is mainly because it is necessary to give time to the transmission mechanisms of the monetary policy to work, so that the consequences of decisions already made can be seen in practice. Final remarks I would like to end with some lessons about monetary policy conduct which have stemmed from the great inflation rise that has taken place since mid-2007, into our current international situation. In the first place, many times it had been noted that Chile was one of the countries where the highest increase in inflation – more than tripling the target – was observed, with the interest rate rising less than in other economies with lower inflationary pressures. As I have already argued, our policy response was completely consistent with a flexible monetary policy framework. As the price shock became stronger and more persistent, monetary policy became more restrictive. This same flexibility in managing monetary policy enables us to react quickly to the strong deterioration of the external conditions today. Fortunately, our economy is solid enough to absorb significant changes in the course of monetary policy, without this being a threat to stability. In the second place, inflationary dynamics are highly complex and cannot be linearly mechanized based on historical evidence. Early this decade, when inflation was consolidating at low levels, we saw that persistence of inflation had dropped substantially, thereby reducing the impact of propagation via indexation and other phenomena that were characteristic of our high-inflation past (García and Valdés, 2005).