In yesterday’s tender offer, 30 of the 500 million dollars were awarded, which is evidence that the international liquidity problems are being properly managed by banks without having to resort to our credit lines. Notwithstanding, the Central Bank of Chile will continue to monitor the external financial conditions in order to mitigate the domestic impact of potentially bigger complications. From the inflationary standpoint, our latest Monetary Policy Report assumed that the international scenario would not contribute in any significant manner to reduce inflation. However, our risk scenario also assumed that a further deterioration of the world economy could not be ruled out, and we are seeing it today. Most likely, in the near future world growth projections will be significantly adjusted downward, helping to reduce inflationary pressures  1  As a function of the benchmark basket of the investment portfolio. BIS Review 123/2008  3  in the medium term. In addition, commodity prices have dropped recently, including a sharp reduction in the prices of oil and grains, especially wheat. Our objective and commitment is that annual inflation gradually converge, over a two-year period, to its 3% target, so monetary policy will continue to be oriented to complying with said objective. The potential inflationary consequences of events occurring internationally will be duly pondered. We have in place a flexible monetary policy that allows for gradual adjustments to both changing international conditions and domestic developments, strongly committed with inflation control, because low inflation ensures the necessary stability for sustained economic growth.

Banking sector debt amounting to nearly 2.7 billion US dollars is maturing in the last quarter of this year, that is, less even than the reserves accumulated from April to date. Meanwhile, the total external debt of the banking sector overall amounts to some 13 billion dollars, the equivalent to 60% of total reserves. The level of Central Bank reserves is sufficient to back the normal operation of the financial system, in particular its needs for foreign funding. The Chilean financial system must be capable of securing funds in international markets, a feature it has displayed for several years already. However, should access to foreign funds and liquidity complicate further, the Central Bank is well prepared and equipped to take decisive action. Precisely the levels of international reserves can do the job. International reserve management To administer international reserves, the Central Bank has separate responsibilities at various hierarchical levels, complying with international recommendations on the matter, and which have been evaluated by the IMF. In addition, internal and independent auditors perform periodical audits to review the Bank’s investment procedures. An internal middle office is in charge of monitoring compliance with the investment guidelines and parameters defined by the Board, on a daily basis. This year, the investment policy for internally managed reserves has been revised on two occasions, which resulted in updating the benchmark comparison, credit risk, and portfolio  2  BIS Review 123/2008  duration, to better safeguard the Bank’s assets and address international markets’ volatility.