massive monetary stimulus packages, and the focus has shifted to when and how fast will it begin raising the fed funds rate. financial conditions began changing last may, when the talk about tampering of the asset purchasing program in the us began. since then, the interest rate on 10 - year us treasury bonds has fluctuated within a range between 2. 5 % and 3 %. while still low by historic standards, it is 100 basis points above its previous level. and we must add to this rise in the treasury bond rate the increase in the foreign credit premiums facing the emerging economies. emerging markets ’ currencies have depreciated substantially against the us dollar, and their market capitalization is lagging behind the advanced economies ’ stock markets. the external financial conditions facing our economies are entering a normalization stage, but they are still favorable from a historic perspective. in short, after six years since the outbreak of the global financial crisis, international conditions are returning to normal. this scenario implies that most latin american countries, including chile, will be getting a weaker impulse from abroad at least in the short run, due to bis central bankers ’ speeches the drop in the terms of trade and the more stringent external credit standards. still, over the medium term, a recovery of developed economies ’ growth is certainly good news. and much more so, if we consider that a persistent “ easy money ” era may create economic and financial imbalances which, the longer they last the higher the price that has to be paid in terms of economic and balance sheet adjustments down the road. the question is, where do the emerging economies stand to deal with this transition? there is no simple answer to this. some have used the boom years to consolidate their fiscal accounts, balance sheets and macroeconomic policies. others have vulnerabilities in some of these areas, which may have been magnified by access to inexpensive, abundant credit in international markets. chile ’ s macroeconomic framework chile has gradually developed a scheme of macroeconomic policies that permits us to deal with the natural volatilities of the business cycle of any open, commodity - exporting economy. this scheme has evolved over time to address the new challenges, such as a growing degree of financial integration to the global economy. this scheme leans on several pillars. one such pillar is our fiscal policy based on a structural balance rule. this rule dictates clear fiscal commitments that ensure that public finances are both sustainable and predictable. our fiscal policy is

jose de gregorio : the monetary policy report and the financial stability report presentation by mr jose de gregorio, governor of the central bank of chile, before the finance commission of the honorable senate of the republic, santiago de chile, 20 june 2011. * * * the monetary policy report of june 2011 and the financial stability report of the first half of 2011 are available at http : / / www. bcentral. cl. introduction mr. president of the finance committee of the senate, senator eduardo frei, senators. i am grateful for the invitation of this committee to the board of the central bank of chile to share our views on the recent macroeconomic and financial developments, their prospects and implications for monetary and financial policy making. these are contained in detail in the monetary policy report ( ipom ) of june 2011 and in the financial stability report ( ief ) of the first half of 2011. the march ipom stated that our economy was facing important challenges. in particular, it configured a scenario where inflation could post significant increases in the following months. we then said that the duty of monetary policy was to withdraw the monetary stimulus in a timely manner, in order to ensure that the inflationary pressures we were seeing and, especially, the risks we faced, would not alter the convergence of inflation to the threepercent target. consistently, the board acted preventively and raised the monetary policy interest rate ( mpr ) by 150 basis points between march and may this year, taking it above levels forecast by the market. this action was taken within a scenario where some of the risks foreseen in march had materialized, and others had dissipated. in particular, as i will review shortly, output grew above expectations during the first quarter, so we are revising upward its annual expansion rate from our march estimate. in contrast, commodity prices have shown a more benign behavior in external markets, as they ceased to increase and posted some declines in the margin for oil prices and some food items. in our june meeting ( last week ), we slowed the pace of mpr increases, taking it to 5. 25 percent. in addition, we said that, in the most likely scenario, further increases in the mpr would be necessary, the timing of which would depend on the incoming information and its implications. changes in monetary policy operate with lags on output and inflation. in the baseline scenario, which i will be presenting in a few moments, the full transmission of the monetary stimulus withdrawal will help in