MONETARY POLICY REPORT PRESENTATION BEFORE THE FINANCE COMMISSION OF THE HONORABLE SENATE OF THE REPUBLIC∗  Rosanna Costa Governor Central Bank of Chile 8 June 2022  ∗  The June 2022 Monetary Policy Report can be found at http://www.bcentral.cl. Introduction Mr. President of the Finance Commission of the Senate, senator Juan Antonio Coloma; senators members of this Commission, ladies, gentlemen, Let me begin by thanking the Commission for inviting the Bank to share our views on recent macroeconomic developments, their outlook and implications for monetary policy. This view is presented in detail in the June 2022 Monetary Policy Report, which we have published this morning. This background is also the rationale behind the decision taken by the Board at yesterday's Monetary Policy Meeting. I need to start by noting that inflation in Chile is at its highest level in decades. The rising inflation phenomenon is affecting many economies; however, the main causes of this increase vary from one country to another. In Chile, the main factor behind the rise in inflation continues to be the sharp increase in demand during 2021. Available estimates show that about two-thirds of the increase in cumulative inflation since the beginning of 2021 is attributable to domestic factors. This takes into account both the impact of higher demand and the significant depreciation of the peso over the past two years, much of which stems from local factors.
They centre on the ability of the economy and financial system to face shocks because of a good external position, large international reserves, and households’ and businesses’ relatively strong equity position. The banks are strong as well, as I have just explained. Furthermore, economic policy has considerable scope to respond, and more than in many other countries. The Treasury is running a surplus, and public debt is historically low. There is significant scope to lower interest rates if conditions call for it, unlike in many of our trading partner countries, as Iceland's interest rates are well above zero. Honoured guests: In my speech today, I have focused on our experience of the past decade and our current position. Now I would like to address some of the challenges ahead for the Central Bank. The first pertains to how we can preserve stability under conditions of virtually unrestricted movement of capital. The Central Bank of Iceland has been preparing itself for this for years. In 2010 and 2012, the Bank published two reports on monetary policy and on prudential rules post-capital controls. Much of what is proposed there has already been put in place. I have discussed these topics extensively, verbally and in writing, in Iceland and abroad. Some of that material can be found on the Bank’s website. 6  The big picture has been sketched out. Unrestricted movement of capital is of great benefit for a small open economy, but there are also significant risks attached to it.