currency parities and the short - term inflation outlook. on one hand, important surprises regarding the timing and the speed with which the federal reserve will raise the benchmark rate may cause significant volatility in global financial markets, pushing interest rates up and further appreciating the dollar. in such a scenario, one cannot rule out that, additionally, we observe an abrupt portfolio rebalancing, given the low level of long - term interest rates and the high stock prices in the united states. although the latest statement by the federal reserve has attenuated the possibility of drastic changes, the risk is still present. on the other hand, there is the situation some emerging markets are enduring, where the macroeconomic scenario could be further complicated if their commodities continue to trade at low prices. this risk is most important for latin america, as it compounds with complex economic and political factors. furthermore, in several countries in the region, fiscal and current - account deficits persist, making the necessary adjustments more difficult and costly. this is not the case of chile, where the policy framework has allowed for a timely macroeconomic adjustment in the last year and a half. and let ’ s not forget the geopolitical conflicts in the middle east and parts of europe, with which we have sadly lived for quite some time. in europe, there is the greek situation and the quirks that have characterized the agreements to finance the debt. on the positive side of risks, it could also happen that the recovery is stronger in the eurozone, which could mean a stronger boost to the world economy and chile. in addition, it is possible that the effects of the drop in the oil price is larger than projected and also that this price remains low for longer. finally, there is still the risk associated to lower growth in china and its consequences on the price of copper. the state of the chinese financial system and real estate sector continue to draw the most attention. at home, the main risk has to do with the evolution of inflation, mainly because of the unrelenting exchange rate depreciation and its accumulated effects on costs. this, in a context of margins that seem to have narrowed because of the high annual growth in nominal wages and the limited pass - through of lower fuel prices in some sectors. therefore, the materialization of an external risk scenario that triggers a significant additional depreciation of the peso may have substantial effects on the short - term inflation outlook, which will depend on the state of

of two overhangs : the nexus of financial sector and sovereign credit risks, ” financial stability review, banque de france, april 2012. 2. viral v. acharaya, itamar drechsler, and philipp schnabl ( 2015 ), “ a pyrrhic victory? bank bailouts and sovereign credit risk, ” journal of finance, 69 ( 6 ), 2689 – 2739. 3. viral v. acharaya and sascha steffen ( 2015 ), “ the “ greatest ” carry trade ever? understanding eurozone bank risks, ” journal of financial economics, 115, 215 – 236. 4. bruegel database of sovereign bond holdings developed in merler and pisani - ferry ( updated as of march 2017 ) - silvia merler and jean pisani - ferry, “ who ’ s afraid of sovereign bonds ”, bruegel policy contribution 2012, february 2012 bruegel. org / publications / datasets / sovereign - bond - holdings /. 1 government securities are defined under law as both central government securities ( g - secs ) and state development loans ( sdls ). in terms of management of interest rate risk in the investment book, both are equally important. in this speech, however, data and charts pertain to only g - secs for simplicity. inclusion of sdls would not change the broad conclusions, and as they contribute to interest - rate risk, would only strengthen them. 2 there are other reasons for banks to focus more closely on interest rate risk that i haven ’ t touched upon in interest of simplicity and brevity. for instance, banks face not just the interest rate risk of the investment portfolio but also to the risk in the banking book. the present guidelines require banks in india to compute change in economic value of equity ( δeve ) and net interest income ( δnii ) for the entire balance sheet and not just for the banking book positions. however, in order to promote global consistency, transparency and comparability of interest rate risk in the banking book ( irrbb ) with that of global banks, banks would be required going forward to compute irrbb separately and disclose it based on revised bcbs standards. similarly, the report of rbi ’ s internal study group to review the working of the marginal cost of funds based lending rate ( mclr ) system has recommended that floating rate loans be referenced to an external benchmark. once introduced, this would expose banks