and productivity. the second purpose of the program is to strengthen our international liquidity position. this means having the tools to deal with external turbulences. all the available evidence shows that a strong international reserves position helps to protect the economy of financial shocks coming from abroad, which in turn reduces the risk premiums of the economy. in our present bis central bankers ’ speeches conjuncture, the level of reserves we are pursuing with the program sets us on a very good foot in case of a major global disruption. holding reserves is tantamount to having an insurance policy. during the good times, it bears a cost associated with the differential between the yield of foreign liquid and safe assets, and the cost of the domestic liabilities that finance them. however, during episodes of global recession and financial stress, the available reserves permit to cushion the impact of the shock on the cost of the country ’ s external financing and provide increased flexibility to economic policies to mitigate the effects on the domestic economy. fluctuations in the international value of the peso cause significant volatility of our accounting results, as we have seen in recent years. in good times, the peso tends to appreciate, which generates accounting losses as the net worth is measured in pesos due to the effect of reserves revaluation. but during times of global slowdown and increased financial stress, the opposite occurs, with a peso depreciation and greater net worth in the books ( figure 5 ). as is typical of our yearly account to the senate, in this report we present the evolution of the bank ’ s balance sheet and its prospects for the next year. in the baseline scenario, if the gap between external and internal interest rates remains, we expect that the profitability of our assets will continue to fall short of the cost of our liabilities. although we foresee no further deterioration in the bank ’ s equity, it will continue to be negative. the recent increase in international reserves has a negative effect on these results, but it has to its favor the intangible benefit of a strengthened liquidity position. however, as we said when we announced the intervention program, the level of international reserves we will reach by the end of the year is close to the limits that can be absorbed by our equity position. still, this net worth – which originates mainly in the costly financial crisis of the 1980s – has not been an obstacle for the bank to conduct its monetary policy with independence and flexibility. to sum up, we face

monetary policy report presentation before the finance commission of the honorable senate of the republic mario marcel governor central bank of chile 5 december 2018 the december 2018 monetary policy report can be found at http : / / www. bcentral. cl. introduction mr president of the senate ’ s finance commission, senator juan pablo letelier, senators members of this commission, ladies, gentlemen, i am grateful for your invitation to present the vision of the board of the central bank of chile ( bcch ) on the recent macroeconomic developments, prospects, and implications for monetary policy. this vision is contained in detail in our december 2018 monetary policy report published this morning. its contents provide the background for the decision adopted by the board at yesterday ’ s monetary policy meeting, and consider the october imacec1 that was released today. at yesterday ’ s meeting, the board decided unanimously to keep the monetary policy rate ( mpr ) unchanged at 2. 75 percent. at the same time, we reiterated that the evolution of macroeconomic conditions make it possible and necessary to gradually reduce the monetary stimulus. this decision is consistent with the analysis and baseline projection scenario i will be sharing with you now. this analysis begins noting that annual inflation has risen throughout the year. after being under 2 % almost the entire second half of 2017, today annual inflation is around 3 %. although this increase owes partly to the more volatile components of the consumer price index ( cpi ) and the depreciation of the peso, inflation of the items in the basket that are most sensitive to the activity gap — ie. services and nontradables — has risen gradually, but steadily, over the course of 2018. this is in line with the growth recovery that began more than a year ago, in a context of favorable external conditions and a clearly expansionary monetary impulse. this process took a pause in the third quarter due to specific factors affecting mining and manufacturing, but it is estimated to resume in the fourth quarter. the october imacec released this morning is an indication, as it shows activity growing 4. 2 % annually, with the non - mining component growing 5. 1 %. with this, the economy will grow 4 % this year and between 3. 25 % and 4. 25 % in 2019. inflation will follow a similar path, slowing down for some months as a result of the fall in international fuel prices, to then begin rising and converging to 3 % towards the end of 2019. key factors in this outlook