Another risk is the ongoing discussion in the United States to ward off a sharp fiscal adjustment in 2013. Failure to reach an agreement could significantly hamper growth and increase market volatility. And central banks of developed economies have continued to boost, and even intensify, very expansionary monetary policies, which can bring consequences on capital flows, asset prices, currency parities, commodity prices and credit growth in the other economies, including Chile. So far the domestic effects of these policies have been limited, but they are certainly a source of concern. Finally, in the emerging world, the biggest risk continues to be the pace of economic activity. Incoming data indicate that China has resumed strong growth, but the weakening of Europe and pending discussions in the United States could affect the Chinese economy, and through it the emerging world. Chile would be especially affected because of its incidence in the determination of the copper price. In addition, the recent drop in world trade growth figures is cause for concern. In Chile, despite particularly low inflation, medium-term inflationary risks remain present. The sustained dynamism of Chile’s economic activity has intensified the use of installed capacity, and a strengthening of domestic demand could trigger inflationary pressures incompatible with the inflation target. So far, inflation has remained bounded and has even decreased. Our evaluation is that the recent drop is a transitory event that will be gradually reversed within the next few quarters to return to levels around the Central Bank’s target.
BIS central bankers’ speeches  3  The baseline scenario reflects those events that are believed to be the most likely with the information at hand at the closing of this Report. There are risk scenarios, however, which if materialized, may reshape the macroeconomic environment – in some cases, significantly – and therefore, may alter the course of monetary policy. On this opportunity, having evaluated the alternative scenarios, the Board estimates that the risk balance is unbiased for both output and inflation. In the world economy, the main risk continues to be the situation in the Eurozone. On one hand are the difficulties in implementing agreements. On the other, like I said, as time has passed, the economic situation of the most affected countries has complicated further, while core European economies seem to be taking a turn for the worse. A sharper deceleration in Germany or France could aggravate the problems in the region and amplify pass-through channels to other economies. Neither can this analysis rule out episodes of volatility in the financial markets that could be more severe than the ones considered in the baseline scenario. However, the potential effects on Chilean banks of a deepening of the crisis in the Eurozone are still bounded. While banks’ profitability and solvency indicators have dropped most recently, stress tests show that the banking system’s level of capital is appropriate to absorb the losses caused by a risk scenario of this kind.