Inflation expectations remain firmly anchored in line with our aim of keeping inflation rates below, but close to, 2% over the medium term. The firm anchoring of inflation expectations is of the essence. Turning to fiscal policies, in view of the ongoing vulnerability to adverse market reactions, countries need to do their utmost to meet their deficit targets and put government debt-toGDP ratios firmly on a downward trajectory. In this regard, the Governing Council takes note of the recently announced measures in some euro area countries to reduce their very large fiscal imbalances. Where necessary, additional corrective measures – preferably on the expenditure side – need to be swiftly defined and implemented. At the same time, all euro area countries should pursue ambitious and credible multi-year consolidation strategies. This will help to strengthen confidence in the sustainability of public finances, reduce risk premia in interest rates and improve the conditions for sound and sustainable growth. Any positive fiscal developments that may emerge, reflecting factors such as a more favourable than expected economic environment, should be exploited to make faster progress with fiscal consolidation. Substantial and far-reaching structural reforms, complementing fiscal adjustment, should be rapidly implemented to enhance the prospects for higher sustainable growth. Major reforms are particularly necessary in those countries that have experienced a loss of competitiveness in the past or that are suffering from high fiscal and external deficits. The removal of labour market rigidities would further support the adjustment process of these economies.

The same is true of their fiscal side, with a deficit that is high and would grow more if local governments were included. Finally, in a currency scheme that is still relatively rigid, expectations of a greater depreciation of the currency could trigger capital outflows, which in the past have caused significant losses of international reserves. Although some of these risks look less pressing than they did a couple of years ago, additional doses of stimulus applied to an economy that has accumulated imbalances, in a more uncertain context and with more stringent financial conditions, amplify the risks in medium-term horizons. The effects of such a scenario could be brought home in Chile through several channels. An escalation of the conflict would certainly threaten our trading partners’ growth, particularly China, by increasing medium-term risks, beyond the particular effects it may have on specific exporting sectors of our economy—depending on whether its products are complements or substitutes of the taxed products. It could also deteriorate financial conditions significantly in the emerging world. In addition, it could pull the price of copper below its long-term level. This external framework would worsen the terms of trade, depreciate the peso and lower prospects for growth, especially due to a downward adjustment in investment. The effects on inflation are not entirely evident. A depreciation would generate short-term upward pressures, while lower growth would widen the gap, generating disinflationary pressures in the medium term, a horizon that is more relevant to the calibration of the monetary impulse.