world has changed. however, it is a fact that activity at the beginning of the year is at a higher level than we envisaged a few months ago. on the other hand, this has been compounded by an increase in the oil price. political tensions in the middle east have again put pressure on this price, thus affecting domestic prices. the effects of a higher oil price can be interpreted at least twofold, with opposing implications for monetary policy. on one hand, in a situation of tight output gaps – as is the case of many emerging economies, chile among them – an increase in the price of energy may exacerbate domestic inflationary pressure, making the dynamics of inflation more complex and demanding great care when assessing the evolution of the inflation trend. on the other hand, in the face of existing risk scenarios, an increase in the oil price also has a negative effect on world activity. if we take into account the fragile state of households, businesses and governments in the developed world, a higher price of energy may further weaken their position and lead to a more lasting and deeper economic fragility. bis central bankers ’ speeches a third factor that has added difficulty to monetary policy management is a renewed concern over capital flows towards the emerging world. the change in investors ’ mood has made them look for other markets in which to invest, and has led to a widespread appreciation of emerging countries ’ currencies. as usual, this has rekindled a debate that was present in our discussions a year back, as to the convenience of implementing measures to avoid currencies from appreciating. last year several emerging economies, among them chile, intervened their exchange markets using different mechanisms. this year some emerging economies have continued to do so. clearly, the discussion as to the convenience or not of performing such actions remains unresolved. the first thing to bear in mind is that in small open economies, all efforts to persistently keep the exchange rate at levels beyond margins aligned with the fundamentals, particularly at overvalued levels, are not sustainable and may eventually generate higher inflation. we are convinced that a floating exchange rate regime is the most appropriate one for the chilean economy, as it facilitates macroeconomic and external accounts adjustments. nonetheless, certain circumstances may lead the central bank to intervene in the forex market, either to maintain an adequate international reserve position or to respond to overreactions of the exchange parity beyond its long - term fundamentals. however, there are

costs associated to this type of intervention. a first cost is that it may create confusion as to the objective of the monetary authorities : inflation or the exchange rate. in our case, we have dealt with this through transparent mechanisms whereby we anticipate the amounts and terms of interventions, and by maintaining a flexible exchange rate. in addition it has always been clear that the exchange rate is not an objective and the main goal of the central bank is price stability. a second cost is of a financial nature. foreign reserves are invested in highly liquid and secure instruments of developed countries, whose interest rates are lower than those of domestic instruments used to finance their acquisition. conversely, the benefits of having these reserves are the enhanced security they provide in case of an abrupt cut of external financing. these benefits are hard to measure, but it is reasonable to expect that they will decline as the availability of reserves increases, as has been occurring in chile since 2008. allow me to express some final thoughts. final thoughts news during these last weeks have led us to a scenario in which the effects of the deteriorating external situation that we forecast some time back are not evident and in which inflationary pressures stemming from a higher cost of energy have resurfaced. hence, if a few months ago it was clear that the most likely scenario for monetary policy in emerging economies was a further loosening, today it is much less clear so. compounded to it is the renewed influx of capital flows towards emerging economies and the resulting appreciation of our currencies. against this backdrop, managing monetary policy has become more complex. today, our assessment continues to be that the crisis in the developed world will sooner or later affect the performance of our economies. it is possible that the impact will be less than what we thought some time ago, but to assume that nothing will happen does not seem sensible. nonetheless, the difficulties involved in measuring the actual impact makes me very cautious in measuring the impulse required by each economy to offset the effects of the external scenario. today, prudent monetary policy management has to be prepared for all kinds of scenarios and to adapt the amount of stimulus applied according to needs established on a case by case basis. as i said a moment ago, activity we see today is at a level above what we bis central bankers ’ speeches forecast a few months back. in fact, in our latest monetary policy meeting we decided to maintain the monetary policy rate at 5 % for a second month in a row. the current situation in developed economies