shock and therefore with transitory effects on inflation, tightening the policy was less than optimal. most recently, the exchange rate broke the upward trend it followed for several quarters. actually, it has dropped compared with its levels early in the year. symmetric to our previous actions, if for this reason inflation were to fall temporarily below our target, we would not apply a more expansionary monetary policy, unless after some time we saw second - round effects jeopardizing the return of inflation to 3 % over a two - year horizon. importantly, any changes in the policy stance in either direction can be warranted only if our medium - term inflation forecast suggests that it will deviate away from the 3 % target. of course this would be determined by changes in its fundamentals. what are the risks we identified in our baseline scenario? on the external front, one of the main risks is a reversal of the improved international financial conditions. as i said, the path that the fed will ultimately take to adjust the policy rate is critical. an increase in the fed funds rate is very likely within this year, and the markets ’ expectations point at very gradual subsequent adjustments. a more aggressive action by the fed could increase global volatility significantly, affecting asset prices, capital flows and currencies. the brexit vote materialized one of the risks outlined in june but, to this date, its effects seem 4 / 14 bis central bankers'speeches bounded. however, its true consequences are still in the making, so further repercussions on medium - term growth in the uk and europe cannot be ruled out. add to this the concerns about the soundness of part of european banks, particularly in italy and portugal. and let ’ s not forget several open electoral processes around the world, whose results could cause a shift towards more protectionist policies. in the emerging world, the overall risk outlook has tended to moderate in the past few months. accordingly, concerns about china have eased, while the chinese impulse policies have stabilized the pace of growth. significant risks remain, however, namely the doubts surrounding the sustainability of these measures over time, as well as about the chinese financial system and real estate sector, among other factors. moreover, a scenario in which the fed ’ s monetary policy becomes more aggressive may have important negative implications on china. in latin america, beyond very recent improvements, adjustments to both public and private spending are still needed. domestically, short - term inflationary risks remain tied to the evolution of

jose de gregorio : what does society expect from the financial sector? panel discussion remarks by mr jose de gregorio, universidad de chile and former governor of the central bank of chile following the per jacobsson lecture by dr yv reddy, 24 june 2012, basel, switzerland. * * * i would like to thank the bis for the invitation to participate in this panel, which makes us look at financial markets from a new perspective. as policymakers, we are used to talking about how the financial system must operate in order to fulfill its goals without threatening financial stability or imposing costs at the aggregate level. in recent years, the discussion has focused on how to avoid excessive procyclicality, contagion, moral hazard, and other important policy concerns. as economists, we have been trying to explain the misbehavior of financial systems, and we are still searching for answers. although we may have some ideas, the policy implications are not straightforward, but the answers cannot wait. policy design needs answers as soon as possible, and delays may cause well intentioned policies to be poorly implemented. but what society really demands from financial systems is quite difficult to define. society is a collection of actors, with different interests and different needs. people want access to the financial system at fair conditions. therefore it is useful to think of society as everyone who is not related directly to the financial industry or policymaking. starting from here, we can say that society is demanding safer and fairer financial systems. the view that financial markets were big casinos, where the betting was done with other people ’ s money and gamblers walked away unpunished, is quite common around the world. public opinion has been dominated by that sentiment, which has also affected policymaking. on financial development let me start by stressing that financial intermediation is good, and with the backlash from the crisis it should be repeated that a well functioning financial system is key to prosperity. it promotes economic growth by channeling investment funds from savers to borrowers ( levine, 2006 ). it is central to promoting entrepreneurship and to facilitating investment, including human capital accumulation. it provides financing to households in order to smooth consumption, and provides insurance. it provides safe and cheap means of payment. the difficulties faced by households and firms in many emerging market economies due to underdeveloped financial institutions and markets should be a clear reminder of this positive role. but financial depth may also be a source of great problems. as in