We necessarily take asset prices into account, both in our forecasts and in our policy decisions, but insofar as we cannot influence them directly we have to be satisfied with seeking to offset their effects on demand and inflation through other channels of the transmission mechanism. And the same is true, in a broader sense, of external demand shocks, which national or regional central banks cannot themselves directly affect, so that they must try to compensate for them through offsetting changes in domestic demand growth. What all this means, in turn, is that the most monetary authorities can hope to achieve is to maintain overall macro-economic stability; we cannot pretend that this means stable conditions for every sector of the economy, still less every individual producer. Now let me be clear, I'm not pleading impotence! Monetary policy can have very powerful effects on overall macro-economic stability. But it is important that the limitations of monetary policy - what it can and what it can't hope to achieve - are clearly understood. Otherwise expectations are likely to be disappointed, and disappointed expectations may lead to building pressure for alternative policy actions, which may not in the event be in our longer-term economic interest. Against that - rather long-winded - background I turn to the uncertainties in the present world economic situation.
For the moment, the signs of output deceleration in the emerging world are moderate and consistent with September’s forecasts. Manufacturing production is down in some economies, and distrust has increased. Worth noting is the slowdown in Brazil and, to a lesser extent, in China (figure 2). Considering forecasts of slower global growth and its effects on the inflationary outlook, a number of central banks at both developed and emerging economies have begun to increase the monetary impulse. 2  BIS central bankers’ speeches  In Chile, these events have had limited effects. The financial market is showing somewhat tighter conditions echoing the situation in the global markets, which can be seen also in other emerging economies (figure 3). In recent months, Chile’s sovereign and corporate long-term debt premiums increased 50 and 70 basis points, respectively, mainly from August and coinciding with a reduction in investments in local bonds by international investors. After being stable for a long period, the cost of short-term bank credit rose to spreads around 110 basis points lately – 45 basis points more than in September. It is worth noting, however, that the local banking system has a diversified credit base. It recently reduced its funding from European banks, but compensated with increased funds from the United States, Canada and Asia. The higher volatility has also affected stock, fixed-income and currency markets, a phenomenon that is also present elsewhere (figure 4).