prices and the stability of the payment system, understood as financial stability. the first of these objectives has been specified under the regime of flexible inflation targeting, and has governed us for over 15 years, setting the target that annual expected cpi inflation must stand at 3 % in a two - year horizon. this regime also considers a floating exchange rate, where the bank reserves the possibility of intervening in the market, a power it has exercised barely four times since this policy came into effect in 1999. this should clarify what lies beyond the objectives of our monetary policy : on the one hand, under the foreign exchange policy i have just described, we do not have a target for the exchange rate. we allow it to settle freely in the market responding to local interest rates and its other macroeconomic determinants. this is relevant because, as the empirical evidence shows, in small, open economies the exchange rate is an important shock absorbing mechanism. second, our target is not short - term inflation, but longer - term inflation. thus, to the extent that inflation fluctuations are perceived as transient, they should not have much impact on our policy decisions. a good example of this is the steep increase in inflation we had between 2014 and 2016. this process originated largely in a shock to the exchange rate that had transitory effects on inflation. of course, the duration of the period of high inflation was long, but it responded to a succession of different shocks and not to the persistent effect of a single one. on the contrary, whenever we identify medium - term pressures on inflation, either upward or downward, we must react with vigor. the same episode which i have just referred to is illustrative in this regard. while in the short term inflation rose as a result of a shock on the exchange rate, with transitory effects, medium - term pressures diminished as a result of a deteriorating economy. had our target been short - term inflation, we should have raised the mpr. as it is not, and what we aim at is medium - term inflation, our decision was to lower the mpr to prevent inflation two years out from falling below the 3 % target. this response of monetary policy is very different from its not so distant past. in the 1990s, when our economy was not yet sufficiently prepared to deal with a currency shock, the bank had to choose between an inflation target and an exchange rate target. the result of the exercise was complex for the chilean economy. not to mention what happened in the early 1980s

to ensure the convergence of inflation to the target, it will be necessary to enhance the monetary impulse somewhat, which reflects in an mpr trajectory similar to the one implied by financial asset prices during the ten days prior to the statistical closing of this report. macroeconomic scenario in february, annual cpi inflation was 2. 7 %, while core inflation — cpiefe ; cpi excluding energy and foodstuffs — was 2. 2 %, driven mainly by its goods component, whose annual growth fell to 0. 4 % in february, in line with the nominal exchange rate, which is now below its year - ago level. the services component of the cpiefe posted an annual change of 3. 4 % in february, a quite milder fall than its goods component, reflecting its greater inertia ( figure 1 ). about this, it is worth noting that one feature of the cpi services basket is that 75 % of its prices are either managed or linked to another indicator or to past inflation, meaning that they are indexed. this fact in practice augments their inertia and causes the effect of any change in the activity gap to take longer to show up. of course, this is not the case for every service price, as non - indexed or non - managed prices tend to show a more visible effect from changes in the gap. one of the boxes in the report is devoted to this, showing how the differences in the recent evolution of services inflation appear when these recently mentioned price groups are taken separately. in this report ’ s baseline scenario we foresee that headline inflation will continue to decline for some months, to return to 3 % by year ’ s end and hover around that mark until the first quarter of 2019, when the current projection horizon ends. the cpiefe will decline steadily until the second half of 2017 and will take longer to hit 3 % ( figure 2 ). this inflation path relies on two assumptions : first, a fairly stable real exchange rate around its current levels, which are estimated to be in line with fundamentals ; second, that although the output gap will exceed the december estimate for some time, it is projected that, for the aforesaid reasons, it will begin to close towards the end of this year. activity growth ended 2016 in line with the december forecast, although characterized by a steeper slowdown during the year, which is expected to continue well into 2017. on 20 march, the bank published the first national accounts figures based on the new benchmark compilation