This program will take the Central Bank’s international liquidity position to the equivalent of 17% of GDP, which is comparable with those of other economies similar to Chile (figure 7). The monetary effects of this measure will be sterilized in order to keep a liquidity provision in pesos in the market in line with the target for the monetary policy rate. The hoarding of international reserves entails financial costs for the Central Bank associated to the differential between the return on investments and the cost of financing them. The level proposed for the international reserves is consistent with the Central Bank’s financial sustainability, although additional leeway is limited. The initial reaction to this announcement was a nearly 5% depreciation of the peso. Nonetheless, the intervention does not pursue a specific level for the exchange rate. Our immediate target is to achieve the stated level of reserves, about 17% of GDP, and to alleviate exchange rate tensions. We remain committed to a floating exchange rate system, and the exchange rate will keep floating during the intervention period. For an economy like Chile, which can encounter significant changes in external financial conditions and in the terms of trade, foreign exchange flexibility is an essential ingredient of its macroeconomic and financial stability. Within a volatile environment like that of the past few years, the inflation targeting regime with a floating exchange rate has displayed its benefits in terms of allowing a smoother trajectory of the Chilean economy.

On the basis of these and other data, recent analyses by ECB staff members suggest that the transmission mechanism of monetary policy is normalising.6 The impact of a monetary policy tightening on economic activity – at almost all horizons – is currently not statistically different from pre-crisis regularities. The impact on inflation shows a similar pattern in terms of time variation.7 In sum, the monetary policy framework of the ECB allows policy rates to be changed according to macroeconomic and price developments area-wide, while its non-standard measures aim to maintain monetary policy transmission so as to make the stance of policy rates effective throughout the euro area. The standard and non-standard measures thus complement one another. The standard monetary policy instrument has been used to pursue the ECB’s primary objective of price stability in the euro area as a whole. The non-standard measures have addressed the impediments to monetary policy transmission stemming from financial market dislocations and related threats to financial stability, and have thus helped to avoid cross-country divergence arising from discrepancies in the national transmission of the common monetary policy. These measures have maintained the effectiveness of the single monetary policy in challenging circumstances. During the crisis, the credibility of the ECB has been instrumental in ensuring that medium-term inflation expectations have remained well-anchored around price stability. This, in turn, has significantly helped to ensure that lower nominal yields at various maturities translate into lower real interest rates, and thus support aggregate demand and avoid the spectre of a deflationary spiral.