. the financial system and intermediation i shall refer firstly to the financial system as a whole, which enables saving to be channelled from agents wishing to lend funds, because they have a surplus of them, to others who wish to borrow funds, since they are lacking financing. adding to this important function performed by the financial system is that of allowing the transmission of risks to those who have a greater wish or capacity to assume it. this is especially important in an environment of uncertainty. an efficient financial system will enable a greater volume of funds to be channeled towards productive investment and therefore will help to boost economic growth and to achieve greater levels of well - being. but the role of an efficient financial system is not confined solely to the important task of channeling savings, liquidity and risks. an efficient financial system should also contribute to improving financial stability and reducing procyclicality, i. e. the amplification of business cycles resulting from the interplay of the real economy and the financial system. an efficient financial system allows the impact of various shocks to be absorbed, distributing them over a lengthier period of time. conversely, an inefficient financial system overreacts at a later juncture, ultimately impacting the real economy considerably. while we know from recent experience that the interaction between the real and the financial economy is increasingly important and intense, we also know that it is likewise very complex. this is not only because of the progressive increase in the relative size of financial markets, but also because of the growing weight of financial channels in the international transmission of shocks and economic conditions : uncertainty and instability on financial markets and the fall in stock market prices affect households ’ financial wealth ; the cost for companies of resorting to the stock markets to obtain financing to undertake new projects rises substantially ; financial institutions readjust their strategies in step with the new risk context, etc. progress in market participants ’ practices and standards supported by financial regulation and supervision that provide incentives for forward - looking strategies are necessary elements of such macro efficiency. in this way, it is possible to gain robustness and room for manoeuvre in good times, and at the same time encourage good risk management. efficiency in individual financial institutions as regards individual efficiency, deposits institutions have the capacity to pursue selection processes among potential borrowers and, at the same time, on the basis of the relative risk, to set different prices. moreover, they undertake monitoring, seeking to minimise the risk of borrowers not

rodrigo vergara : the monetary policy report and the financial stability report presentation by mr rodrigo vergara, governor of the central bank of chile, before the finance commission of the honorable senate of the republic, santiago de chile, 15 december 2014. * * * the monetary policy report of december 2014 and the financial stability report of the second half of 2014 can be accessed at http : / / www. bcentral. cl. introduction mr. president of the finance commission of the senate, senator ricardo lagos, senators members of this commission, ladies, gentlemen. thank you for inviting me to present central bank of chile ’ s financial and macroeconomic outlook and its view on the most recent developments and their implications for monetary and financial policy. this vision is contained in detail in our december 2014 monetary policy report ( ipom ) and our financial stability report ( ief ) of the second half of 2014. in recent months, our macroeconomic outlook has reflected unexpectedly high inflation and a slowdown in economic growth. in the projection scenario that i will be presenting shortly, we have revised upward our inflation forecast for the coming months, although we continue to estimate that it will converge to 3 percent during 2015. we have also revised downward our growth forecast for domestic output and demand this and next year. there are several factors underlying these corrections. the inflation surprises of the past few months originated in specific prices and were mostly temporary. still, the high level of annual inflation today is largely due to the significant depreciation of our currency in recent quarters. on the output side, third - quarter figures showed gdp and domestic demand growing less than forecasted. in addition, fourth - quarter figures at hand show no signs of significant recovery. thus, we foresee that achieving higher output growth rates will take longer than we thought last september. on aggregate, the international scenario has changed little since our last ipom. perhaps the most significant development has been the sharp fall in the oil price in the past months, whose effects have begun to show in prices and will intensify in the near future. meanwhile, although risk perceptions have increased and we had an important volatility episode in october – which vanished soon – no significant changes are observed in terms of global growth. at home, we completed a process of reducing the monetary policy interest rate ( mpr ), that took it from 5 to 3 percent between october 2013 and october 2014. this sharp reduction led the mpr to quite expansionary territory, in line with