This observation, combined with the increased securitization of real estate into diversified national portfolios, gave buyers – and those rating the securitizations – confidence that the “real estate cycle risk” was substantially mitigated through diversification. But, as Figure 7 shows, the assumption that a geographically diversified portfolio of real estate assets would avoid price declines proved wrong. While prices nationally had not experienced a substantial decline in the past, for three years the U.S. has experienced substantial and sustained declines in prices. Some of my colleagues point out, probably appropriately, that given the historical data the failure to anticipate nationwide house prices falling is largely understandable. It was certainly very widespread. What may be more surprising is that in the 2005 timeframe, when many were expecting house prices to slow down or flatten, there was not much by way of risk mitigation undertaken. Myth 2 – Triple-A mortgage securities carried little risk The securitization market – that is, the market for securities based on various slices of pooled mortgages – grew dramatically over the past decade. One reason for the growth in securitization was investor interest in, and demand for, securities with little credit risk but returns above those of Treasuries. Many buyers of such securities felt sure of two things. First, that national real estate prices were quite unlikely to fall – in other words, our Myth 1. Second, that even in the highly unlikely event that the price of a national portfolio did fall, they would be protected by the structure of the securitization.

There is also the effect of net exports, part of which we saw in the first quarter, resulting from both higher prices in dollars and the reallocation of internal resources derived from the real depreciation of the currency. Add that the developed world will perform better. Finally, there is the impulse coming from public spending, particularly investment, because of the low budget execution of 2013. In the opposite direction point the aforesaid deterioration in business confidence and the downward revisions to the investment project agenda made by the Chilean capital goods corporation for 2014. The 2014 current account deficit forecast is revised downwards mainly because of the foreseen deceleration in investment and a slight increase in savings because of lower private consumption. In the trade balance this is visible mainly in a downward revision to imports. Accordingly, the baseline scenario includes a current account deficit of 2.5 percent of GDP in 2014 (3.6 percent in March). The lower outlook for expenditure also implies that, at trend prices, the deficit will decline further, to 2.2 percent of GDP (3 percent in March) (table 2). The forecast path for inflation rests on several assumptions. For one, in that the passthrough from the peso depreciation to prices will be in line with its historical pattern. In addition, the Board uses as a methodological assumption that the real exchange rate (RER) will remain close to current values, as it is now within the range that is considered consistent  BIS central bankers’ speeches  3  with its long-term fundamentals.