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

- mining - 2 - 2 source : central bank of chile. figure 2 manufacturing output index private salaried hours worked ( * ) ( annual change, percent ) ( seasonally - adjusted levels, weekly average ) habitual ( right axis ) effectivas - 4 - 4 - 8 - 8 ( * ) black dashed lines show annual centered moving average of respective series. sources : central bank of chile and national statistics institute ( ine ). figure 3 domestic demand gfcf ( real annual change, percent ) ( real annual change, percent ) - 3 - 3 - 6 gfcf private consumption - 6 - 6 - 12 - 9 - 9 - 18 machinery & equipment - 6 construction & other works - 12 - 18 source : central bank of chile. figure 4 2018 growth forecasts ( mp report ) ( real annual change, percent ) 5. 0 5. 0 4. 5 4. 0 4. 5 4. 5 4. 0 4. 0 4. 0 4. 0 3. 5 4. 0 3. 5 3. 25 3. 0 3. 0 3. 0 2. 5 2. 5 march june september source : central bank of chile. december figure 5 real annual contributions to gross fixed capital formation gfcf ( * ) ( percentage points ) - 4 - 4 - 8 - 8 - 12 - 12 - 16 - 16 housing other mining non - mining ( * ) for 2017 mining investment is estimated using information available from companies'uniform coded statistical report fecu. housing investment uses household investment figures in the national accounts by institutional sector. the gfcf component " other " is treated as a residue. to report forecasts for 2018, 2019 and 2020, central bank forecasting models and sectoral sources are used, including the corporation of capital goods'investment plans and survey. source : central bank of chile. figure 6 real loans ( 1 ) ( annual change, percent ) interest rates by type of loan ( index, 2002 - 2018 = 100 ) 25 200 consumer commercial 20 175 housing commercial 15 150 consumer 10 125 vivienda - 5 - 5 ( 1 ) real data built with cpi splicing of 2013 annual base ( 3 ) weighted average rates of all operations performed each dashed horizontal lines show each series'average for the last 10 month. ( 4 ) loans denominated in ufs. years. source : central bank of chile using sbif data. figure 7 inflation indicators ( annual change, percent ) cpiefe for services and