Accordingly, in the past several months we have seen main stock indexes falling substantially, interbank spreads rising again and commodities prices falling, with only a few exceptions, including gold (figure 2). Increased appetite for safe financial assets has triggered a worldwide reduction in interest rates on this type of instruments, while the dollar has strengthened and the euro has depreciated. The significant capital flows to emerging economies have stabilized or reversed partially, in particular stock-portfolio flows. Nevertheless the preoccupation remains in many emerging economies – especially in Asia – about the creation of bubbles in their asset prices. As shown in the IEF, the domestic financial market, like those in other emerging economies, has been fairly resilient to the instability in external markets, which is visible in several dimensions. The bulk of the price adjustment has taken place in the foreign exchange and stock markets, but even these movements have been comparatively small (figure 3). Unlike recent episodes of financial volatility, local monetary markets have operated normally, and credit spreads have no risen significant. Chilean sovereign risk premiums have not changed much, and local banks have managed to obtain external loans in similar conditions to those at the end of 2009. Recently, pension funds have reduced their assets abroad, a phenomenon that also occurred during the worst external turbulences at the end of 2008. The baseline scenario assumes that this relative resilience will continue over the projection horizon.
Today, however, the economy is still operating below full capacity, which limits inflationary pressures and is consistent with monetary policy remaining significantly expansionary. Nonetheless, as output gaps close, inflationary pressures will be incubated which must be contained in time in order to ensure that annual inflation will stand at 3% over the two-year policy horizon. Hence, the Board estimates that achieving the inflation target in the projection horizon requires, as has been said in recent months, a progressive normalization of the current significant monetary stimulus. As a working assumption, the baseline scenario estimates that the level of the MPR one year ahead will be similar to the one inferred from private expectations. In the long term, it will converge to its neutral level (figure 8). As usual, the outlined scenario is subject to several risks. Internally, the greatest risks come from domestic expenditure. The baseline scenario considers that a significant part of its current strong expansion is temporary. However, there is a risk that said strength is largely the response to stimulative macroeconomic conditions, which would mean that the downturn foreseen in the second half of this year may not occur, speeding the closing of output gaps. The medium-term impact on aggregate demand of reconstruction works and the funding thereof will have to be assessed continually. In the immediate term, April data and the reaction of economic sectors to the earthquake and tsunami reduces the possibility of a generalized delay in the economic recovery.