10.04.2023  Latest monetary policy developments in the euro area The Brookings Institution The Hutchins Center on Fiscal and Monetary Policy Washington, DC. Pablo Hernández de Cos Governor  Good morning, it is a pleasure to visit the Hutchins Center on Fiscal and Monetary Policy and share with you my reflections on euro area monetary policy at a still very challenging time for central banks globally. I will start by briefly describing the decisions that we adopted at our European Central Bank (ECB) Governing Council meeting in March. Then, I will lay out a number of factors that will determine our future decisions and will require close monitoring going forward. Our March meeting took place in the context of the financial tensions related to the banking sector in the US and in Switzerland. These tensions increased investor risk aversion and financial market volatility and led to a global drop in bank share prices. While the European banking sector is resilient, with strong capital and liquidity positions, the main message from our meeting was that we are closely monitoring these financial tensions and we stand ready to respond as and when necessary to maintain price and financial stability in the euro area.
Monetary policy and exchange rate intervention  Last October, when I was invited to the House of Representatives to analyze the exchange rate, I said there are three major principles in monetary policy conduct. The first is that the Central Bank is not indifferent to exchange rate movements. Compliance with our constitutional mandate demands adopting measures to orient the economy toward full use of its resources and ensuring a balance of payments that is sustainable over time. The international price of our currency is a very important variable in the Chilean economy’s performance, as it affects growth, inflation and the external accounts, and ultimately our monetary policy decisions. For example, in recent months the appreciation of the peso has  3  helped attenuate inflationary pressures stemming from narrowing output gaps. This has been an input in our decisions so, were it not for the strengthened exchange rate, our monetary policy interest rate would probably be higher than it actually is. A second principle is careful assessment of our decisions’ effectiveness, costs and benefits. We make no decision without being technically convinced that it will be effective and convenient for the economy as a whole. Acting otherwise would only erode our reputation and credibility, indispensable elements for achieving our objectives at the lowest social cost possible. Finally, a third principle is that the Central Bank of Chile does not use the exchange rate to target inflation.