Thus, annual CPI variation went from its 9.9 percent peak of October 2008 to 4.5 percent in April. Most measures of inflation expectations show a decline in recent months, particularly for the short term (Figure 9). The baseline scenario of this Report assumes that year-on-year inflation will continue on a downward path in the coming months with large swings between the end of this year and the  4  BIS Review 65/2009  beginning of 2010. This, because of the changes in the basis of comparison that include high figures from May through October 2008 and negative ones that accumulated from last November to February (Figure 10). Therefore, in the baseline scenario, annual CPI inflation will be negative from the end of the third quarter to the beginning of the fourth, to close the year 2009 at 0.6 percent. Then it should pick up gradually, to reach 3 percent at the end of the policy horizon, this time the second quarter of 2011. The rate of annual variation of core indicators has also dropped, a trend that will prevail until the first half of 2010, when they will start growing steadily to also hit 3 percent by the end of the policy horizon (Table 3). The path projected for inflation rests on a number of assumptions. On one hand, import costs will not be a source of additional inflationary pressures. Commodity prices will post small increases in the next two years, in line with the slow recovery foreseen for the world economy.
As usual, the baseline scenario described above reflects the events that are believed to be most likely to occur with the information available at the closing of this Report. Logically, different events will lead to different macroeconomic conditions and, therefore, an MPR path that will also differ. Currently, the level of uncertainty is definitely higher than normal and, after assessing the probability of alternative scenarios, the Board considers that the balance  BIS Review 65/2009  5  of risks for growth is biased downward, and is unbiased for inflation. The main risks are associated, once again, to the complex global economic outlook. In the past few weeks, some signs of stabilization of the crisis in developed economies have begun to show up, with a marginal recovery of manufacturing output, exports and confidence indicators in different economies, particularly in Asia. It is possible that these signs may be just another stage in the volatility shown by the markets in the past several quarters, and new stressful situations may arise that could worsen the already precarious situation of the world economy. Meanwhile, if the rebound of stock markets and the reduced risk aversion are solid indications that uncertainty is fading out, a more widespread recovery of global output and demand may be seen in the short run at the global level. The materialization of some of these risks could have important implications on the domestic economy, mainly consumers and entrepreneurs’ expectations possibly taking longer than predicted to improve, or the economy quickly recovering from its current state.