[ inf * res * as ] monetary policy report financial stability report presentation before the finance committee of the honorable senate of the republic∗ mario marcel governor central bank of chile 5 june 2017 you may browse the monetary policy report of june 2017 and the financial stability report of the first half of 2017 at http : / / www. bcentral. cl ∗ introduction mr. president of the senate ’ s finance committee, senator carlos montes, senators members of this commission, ladies, gentlemen. thank you for your invitation to present the vision of the board of the central bank of chile on the recent macroeconomic and financial developments, projections and implications for monetary and financial policy. this vision is detailed in our june monetary policy report and our financial stability report for the first half of this year. in the past few months, the macroeconomic scenario has evolved in line with forecasts depicted in our march monetary policy report. on one hand, inflation has brought no surprises, consistently with an exchange rate that has changed little since mid - 2016 and gradually expanding capacity gaps. first - quarter activity growth was virtually flat in annual terms, largely affected by downtime in escondida mining company, in a context of still very weak performance of sectors linked to construction investment. in contrast, consumption shows a more stable outlook, driven by significant growth in demand for durable goods, which has offset the poorer performance of the other components. the external scenario, beyond recent volatilities, continues to signal higher growth in the developed world, with favorable financial conditions for emerging markets and commodity prices without major changes, after having begun a recovering in late 2016. thus, although important external and domestic sources of uncertainty remain, prospects for this year and next are in line with forecasts. accordingly, the projections in the baseline scenario that i will be sharing with you in a moment, assume that monetary policy will remain expansionary throughout the projection horizon, so that inflation will fluctuate around 3 % during much of the period, and activity will recover higher rates of expansion, especially towards the second half of 2017 and into 2018. let me now present the details of our vision about the macroeconomic scenario and estimates contained in our monetary policy report. the monetary policy report recent evolution of the economy and our projections the inflation outlook shows no substantive changes. annual cpi variation has been at 2. 7 % since february, while core inflation — the cpiefe — has decreased slightly ( figure 1 ). the baseline scenario estimates that the real exchange

. the impact of the depreciation on other prices in the cpi basket has been in line with expectations ; core inflation ( i. e., the cpiefe that excludes foodstuffs and energy ) has also risen, although at a slower pace than headline cpi. inflation expectations have remained at 3 percent in the projection horizon, with a slight increase in the near term. the baseline scenario assumes that y - o - y cpi inflation will rise temporarily to the 3. 5 to 4 percent range, in the coming months, reflecting the direct propagation of the peso depreciation to the prices of goods and services. the lower use of installed capacity – proxied by the behavior of output – should mitigate inflationary pressures and the direct effects of the depreciation. as i just said, the credibility and consolidation of our inflationtargeting scheme also help. therefore, already by the end of 2014 headline inflation should move closer to 3 percent, where it should stay until the end of the projection horizon, that is, the first quarter of 2016. core inflation will hover around 3 percent throughout the same horizon ( figure 7 ). bis central bankers ’ speeches the current account deficit of the balance of payments is forecast to stand at 3. 6 percent of gdp in 2014, up a little from 2013, but below the december estimate. behind it is the expected decline in the copper price this year, which more than offsets the lower growth foreseen in domestic demand and imports. this implies that, measured at trend prices, the deficit will narrow further, approaching 3 percent of gdp. as for gdp, the rate of total investment will go slightly above 23 percent in nominal terms ( somewhat more than 25 percent in real terms ), while national savings should amount to 19. 5 percent ( table 2 ). aside from the already discussed trajectories foreseen for domestic growth and the world economy, this forecast uses as a working assumption that nominal wages will be adjusted in line with productivity and the inflation target. it also uses as a methodological assumption that the real exchange rate will remain stable, considering that it is now inside the range believed to be consistent with its long - term fundamentals. finally, the baseline scenario uses as a working methodological assumption that the mpr will follow a trend comparable with the one that can be derived by the prices of financial assets prevailing at the statistical closing of this report ( figure 8 ). the baseline scenario reflects those events that are