And despite all these imperfections, history has shown that, with the increasing freedom of international trade, the world is in many ways a better place to live in. I believe that the same sentiment can generally be applied to international finance. Indeed, in much the same spirit as in the promotion of free trade, a great deal of effort and commitment has been put into the promotion of the free flow of capital in recent decades. Financial liberalisation became very much the fashion, leading to domestic financial markets rapidly attaining a global dimension, welcoming and absorbing international capital. This created opportunities for international financial intermediation, channelling savings into productive investments across countries and across currencies, enhancing the efficiency in the use of global capital and contributing to promoting global economic growth and development. But, as in the case of international trade, there is also a need for institutions and mechanisms to deal with the undesirable aspects of international finance. We now have a situation in which individual financial institutions are in a position to mobilise financial resources larger than the Gross Domestic Product of an economy. They can take dominating positions in particular markets and dictate short-term market movements in their own interests. Small open markets have become increasingly vulnerable to international capital. Whilst many of them have benefited greatly from an abundance of international capital, both in the form of foreign direct investment and foreign portfolio investment, they have also become easily overwhelmed by such flows.

U.S. growth may weaken more than foreseen, with effects on financial markets – in particular stock index reversals – and new  4  BIS Review 126/2010  postponements of the monetary stimulus withdrawal. The fiscal accounts in developed economies – especially in some countries in Europe – is still cause for concern, mainly because of their effects on perceived risks and in the final recovery of the world economy. Furthermore, measures adopted in China to limit credit growth and prevent an overheating may result in a weaker world economy and lower commodity prices. As usual, the persistence of global imbalances entails risks both on capital flows across economic areas and on the behavior of parities between different currencies. In the recent past, the trajectory of international food prices has reopened the concern on its future performance and its impact on inflation, given the high degree of pass-through we observed in Chile from world price hikes in 2007 and the first half of 2008. Overall, it is not that clear that, if wheat prices continue to rise internationally, the local economy will replicate them, because domestic margins have remained fairly large. If any of these scenarios materializes, there will be direct consequences for the growth and inflation scenario foreseen by the Board. After considering all the elements described, the Board believes that the balance of risks for inflation and output is unbiased, and we reiterate that we will continue to use our policies with flexibility so that projected inflation stands at 3% in the policy horizon.