all considered, the risks in the external scenario, although more limited, are still significant. the economies of peripheral europe need substantial funding this year and next. the governments must implement large fiscal adjustments, which in practice may encounter increasing political and social resistance, the same as the financing of new rescue packages in the surplus economies in the region. the economic, social and political costs are paid in the short term and may create tensions, while its fruits can only be reaped in the medium term. furthermore, the banking system is facing capitalization challenges that may curtail credit to the private sector. rigidities of exchange rates and wages delay the resolution of competitiveness problems in some economies. all this, aside from shaping a very frail growth scenario in the zone, opens the door to new stress episodes in external financial markets. although so far the international scenario has not been as negative as was expected, taking for granted that the slower global growth and tensions in external financial markets will not affect our economy is not wise thinking. thus, while the inflation trajectory in chile, the stronger growth in demand and output and changes in certain prices such as oil and fresh fruits & vegetables, have risen the risks for short - term inflation, the risks in the external scenario are still significant. let me now describe the macroeconomic scenario assumed in our monetary policy report. macroeconomic scenario relative to december, world growth shows no major change on aggregate, although its composition has changed and, certainly, so have the associated risks. in the united states, improved figures of job creation, manufacturing output and expectations reflect on upward revisions to forecasts for this year, partly offsetting the gloomier outlook for the eurozone. a somewhat deeper recession is expected in the zone for this year, which, due to its commercial and financial links, reflects, albeit marginally, in revised growth projections elsewhere, especially in emerging europe and asia. with respect to december forecasts, trading partners ’ growth is unchanged for 2012 and 2013. the baseline scenario also assumes that the oil price will remain high for longer than projected in december. it also raises projections for the copper price to averages of us $ 3. 7 and us $ 3. 6 per pound this year and next. this translates into better terms of trade than previously thought ( table 1 ). greater appetite for risk has also fostered a resumption of capital inflows to emerging economies. facing reduced tensions, many emerging economies ’ central banks have suspended their processes of enhanced monetary stimulus they

, to have in place sound prudential regulation during periods of abundance of capital is essential for financial stability, as we are reminded by the crisis in chile in the early 1980s, the mexican crisis of the mid - 1990s, the asian crisis, and more recently, the crisis in eastern europe. even if one could accept that monetary tightening could be an appropriate response to combat an asset price bubble such as the recent housing price bubble, with all the caveats i discussed before, the problem is more acute in small open economies. tightening monetary policy may have perverse effects, since it induces further capital inflows and strengthens the currency. in this case, the interest rate is not the most adequate instrument with which to burst the bubble. indeed, the perverse dynamics are as follows : high interest rate differentials induce capital inflows to arbitrage those differences ; then policymakers strive to avoid the appreciation, which in general is thought to be transitory, since the sustainability of exchange rate management is limited ; the incentives for inflows increase as not only the interest rate differential is large, but also the expectations of appreciation ; finally, the appreciation takes place, which validates the expectations of arbitrageurs. this process goes for a while and may be accommodated gradually or ended by a sudden stop. in this process there are “ excess ” inflows and “ excess appreciation ”, and the issue is how to avoid those excesses. according to the simple dynamics i have just described a first line of defense to avoid excess fluctuations of capital flows is to maintain exchange rate flexibility. this prevents investors from speculating against an authority that will be defending the parity only transitorily. moreover, by introducing volatility it increases the risks of a one sided bet on the exchange rate. an inflation commitment may also help to stabilize flows. as i discussed before, massive inflows that appreciate the currencies will result in a loosening of monetary policy that should reduce the incentives for carry trade. in contrast, if capital inflows generate a boom of activity, without inflationary consequences due to the appreciation of the currency, there could be the temptation to tighten monetary policy, aggravating the problem of massive inflows. to control expenditure without increasing pressures on the exchange rate, fiscal policy should help. a credible inflation target with a flexible exchange rate regime should help to avoid the problems we faced during the 1990s. indeed, during the period of large capital in