BIS Review 61/2010  9  Figure 5 Inflation indicators (annual change, percent)  12  12  9  9  6  6  3  3  0  0  -3  06  07 CPI  08  CPIX  09  CPIX1  10  -3  CPI w/o foodstuffs and energy  Sources: Central Bank of Chile and National Statistics Bureau (INE). Figure 6 World growth (annualized quarterly change, percent)  Commodities prices (indices Jan/2/2006=100) 350  350  300  300  250  250  0  200  200  -5  -5  150  150  -10  -10  100  100  -15  -15  50  50  0  0  10  10  5  5  0  06  07  08  09  U.S.A. Eurozone Trading partners Japan  06  07  08  09  10  Copper WTI oil Grains and cereals (*)  (*) S&P GSCI index for grains and cereals. Sources: Central Bank of Chile based on the statistics institutes of each country, Bloomberg, Consensus Forecasts, and International Monetary Fund.
Conceptually, this can be understood as a supply shock, as it destroys part of the country’s productive capacity and cuts down the level of potential output. All other things being equal, this fact causes output gaps to close and inflationary pressures to increase. These pressures must be contained to prevent inflation from surpassing the 3 percent target over a two-year horizon. The virtue of our monetary policy regime is that it is based on achieving the objective over a medium-term horizon, which gives room for adjusting the monetary stimulus while maintaining sustainable economic growth during the reconstruction. Properly conducting this process is the challenge we face and that provides the framework for the analysis contained in this Monetary Policy Report. In what follows, I will describe the latest economic and financial events, our preliminary assessment of the effects of the earthquake and tsunami on the prospects and risks facing our economy, and the way in which annual inflation will converge to the 3 percent target over the two-year horizon. Macroeconomic scenario As I have said before, Chile’s macroeconomic scenario has suffered major changes since December’s Monetary Policy Report. Among a large number of developments, two elements stand out. There is no doubt that the most significant is the earthquake and tsunami of last February and both their immediate and medium-term implications for growth and inflation.