Market expectations are very similar to the forecasts included in our latest Report, and also point to CPI inflation fluctuating around our 3% target starting the end of this year. Convergence of inflation rests on two main assumptions. The first one, that our RER will remain relatively stable at its current levels; a level we believe is consistent with fundamentals. And the second one, that the output gap will gradually close by the end of this year (figure 3). Figure 3  CPI Inflation (*)  Core inflation (*)  (annual change, percent)  (annual change, percent)  6  6  6  6  5  5  5  5  4  4  4  4  3  3  3  3  2  2  2  2  1  1  1  1  0  0  0 11 12 13 14 15 16 17 18 19 Mar. 2017 Report  0 11 12 13 14 15 16 17 18 19 Dec. 2016 Report  (*) The grey area, starting from the first quarter of 2017, corresponds to the forecast. Sources: Central Bank of Chile and National Statistics Institute. 5. Actually, activity has been worse than expected. According to recent data the output gap is currently somewhat larger than we anticipated in December. GDP grew by 1.6% in 2016, in line with what was anticipated then.
Strength of our country is the fact that compared to earlier low-growth periods it has more liquid external funds available. At the same time, the financial sector is healthy and non-performing loans have diminished over time. Reforms currently under discussion, particularly a New General Banking Law, aim to bolster resilience and improve banking capital adequacy ratios (figure 10). Figure 10 Regulatory Capital  NPL  (percent of risk-weighted assets)  (percent of total loans)  Latin America (*)  Chile  18  18  15  15  12  12  9  9  6  6  3  3  0  0 10  11  12  13  14  15  16  3  3  2  2  1  1  0  0 10  11  12  13  14  15  16  (*) Shows the region’s simple average. Source: Global Financial Stability Report, IMF. The medium- and long-term outlook 19. The Chilean economy has endured a long period of slow growth, while its potential growth has dropped to a range between 2.5% and 3%, i.e., less than estimated a decade ago (4% to 5%). In principle, this change is explained by: (a) a smaller contribution of the accumulation of productive factors, inherent to a maturing economy; (b) a drop in gross fixed capital formation that has lasted several years; (c) reduced mining productivity; and (d) a limited contribution of productivity growth in the other sectors. 20.