, their financial fragility hinders the possibility of a strong come back. the financial situation of households and governments is complex because of their high degree bis central bankers ’ speeches of indebtedness. therefore, it is unlikely that their domestic demands will become a source of output expansion. thus, the basis for faster growth lies, for now, on the demand from the rest of the world. their weak currencies are consistent with this. in this scenario, another paradox arises. germany, the strongest economy in the european union, whose example the peripheral countries should follow, has been one of the biggest winners in this conjuncture. its fiscal rigor and productive strength as one of the world ’ s greatest suppliers of capital goods have been boosted by a relatively weak euro. if germany did not share the common currency, the deutschmark would be without a doubt the strongest in the world, quite above the equivalent of 1. 4 us dollars per euro. belonging to a fragile monetary union has given it the benefits of a relatively weak currency, which has been an important factor of its fast expansion. to blend more ingredients into the world economic cocktail, again we face a substantial increase in commodity prices. as usual, it can be attributed to various factors. one is the fast growth of emerging economies and the subsequent increase in demand. add to this, among others, climate elements that have hindered the production of foods, and geopolitical risks that have pushed up the oil price. these high prices, combined with the fact that emerging economies are near their potential growth level, some with clear signs of overheating, both actual and expected inflation have risen all over the world. several emerging economies, chile among them, have withdrawn monetary stimulus as a response to this cycle. in contrast, developed economies, with a timid recovery, have not only sustained their ongoing monetary packages but are expected to keep them in place for a while. this mixture of monetary policy imbalances, high commodity prices, and good growth prospects in emerging economies have created tensions in exchange rates and capital flows, two issues i will refer to now. the exchange rate and capital flows before the financial crisis hit, some developed economies, particularly the united states, were accumulating big deficits in their current accounts. this excess spending was being financed by surpluses in emerging markets, primarily china with its high saving rates, and oil - exporting economies ( figure 4 ). global imbalances were an important

rodrigo vergara : chile ’ s latest monetary policy report presentation by mr rodrigo vergara, governor of the central bank of chile, of the monetary policy report before the finance commission of the honorable senate of the republic, santiago de chile, 3 april 2012. the monetary policy report of march 2012 can be found at http : / / www. bcentral. cl. * * * introduction mr. president of the senate ’ s finance commission, senator jose garcia ruminot, 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 on recent macroeconomic developments, their prospects and implications for monetary policy making, which is contained in detail in our march 2012 monetary policy report. when we presented our previous report to this commission last december, the international financial markets – and, though to a lesser extent, the chilean market too – were going through significant tension. the outlook for growth in chile and in the world at large reflected great uncertainty, and there was significant risk of the situation in the eurozone aggravating and becoming the lehman brothers ’ downfall of september 2008 revisited. we then were emphatic in saying that the chilean economy was healthy, but that the crisis abroad could end up affecting our growth prospects. we also said that the magnitude of those effects was difficult to estimate. in that context, we lowered the growth range forecast for 2012 and pointed out that, given the international threats facing us, the balance of risks for growth was biased downward. we stated our willingness to take action in order to mitigate the impact of the external scenario on the chilean economy, having the necessary tools to deal with adverse situations. thus, in late december we took exceptional measures to ease the frictions present in the domestic money market and, in january, we preemptively reduced the monetary policy rate ( mpr ) by 25 basis points. facing the uncertain external situation, the expectations of most market analysts and brokers anticipated the need for further reductions of the mpr. with the passing of time, we have seen a somewhat more favorable evolution of the external scenario. in general, confidence has partially returned to global financial markets, expressed in lower risk spreads and higher commodity prices. the outlook for world growth is still weak, even lower than our expectations in december, but the likelihood of a more adverse scenario has decreased. in chile, domestic demand and output have outperformed december ’ s projections. meanwhile,