In addition, short-term figures known since the publication of our last Report point at milder short-term inflationary prospects. The latest output indicators have been more negative than we foresaw in May. Although for the moment this does not alter our forecast of a recovery of activity and demand in the second half of this year, it does present a scenario where output gaps are wider than estimated and, therefore, inflationary pressures are reduced. The labor market also continues to reflect deteriorated macroeconomic conditions, with steadily increasing unemployment although with a marginally moderated drop in employment. May’s inflation was negative beyond expectations, especially its underlying components. Year-on-year CPI inflation, after many months, returned to the tolerance range of the inflation target (figure 2), but is expected to continue to fall and even cross into negative territory in the latter part of the year. Inflation expectations derived from various surveys also show some declines in the last few months. Recent public discussions have centered on parity movements. The real exchange rate is, without any doubt, a key variable in resource allocation and in the balance between saving and investment. Unlike conjunctures of past decades, in particular those of the mid-1980s, the Chilean economy has dealt with the complex global financial situation from a much sounder standpoint. The sudden global collapse of late last year found us with no big currentaccount or fiscal deficit, nor with a high external debt requiring strong fiscal adjustments with substantial real depreciation that would place the economy in a sustainable medium-term path.

An open exchange of views and information between individual policy actors - without any commitment or mandate to take and implement joint decisions - will strengthen economic governance if it manages to improve the common understanding of the objectives and responsibilities of the respective policy areas and does not dilute accountability. The central legal basis for economic policy co-ordination among Member States within monetary Union is specified in Article 99 (ex 103) of the Maastricht Treaty, which states that “Member States shall regard their economic policies as a matter of common concern and shall co-ordinate them within the Council.” On the basis of this principle, the framework for the definition of economic policy priorities is provided by the “Broad Economic Policy Guidelines” adopted by the Council each year. These channels for policy co-ordination among Member States do not involve the independent monetary policy of the ECB. Any form of exchange of views and information, however, should clearly be distinguished from an attempt to co-ordinate macro-economic policies ex ante, which would give rise to serious information, incentive and enforcement problems. Ex ante co-ordination among different policy actors would blur the fundamental responsibilities of the respective policy areas under the Treaty. This, in turn would reduce accountability of individual policy actors and ultimately increase uncertainty about the policy framework. Given the Eurosystem’s monetary policy strategy, there should be no ambiguity how the single monetary policy will respond to developments in fiscal policies and wage settlements to the extent that they will affect the maintenance of price stability.