where inflation has remained high for quite some time has not driven inflation expectations away from the policy target, which attests to the credibility of the chilean monetary policy ( figure 6 ). in line with earlier reports, inflation remaining high for almost two years responds largely to the direct and indirect effects of the exchange rate depreciation, in a context where past inflation indexation and tight capacity gaps have kept non - tradable inflation at a high level. in the baseline scenario, core inflation will converge to near its historic average by mid - 2017. this process will be largely determined by the fact that, beyond the usual volatility, no further depreciations are expected of the magnitude seen in recent years. it is worth saying that, with significant fluctuations, the peso / dollar parity has dropped since december and, at the statistical cutoff date of the report, it was near its levels of august 2015. the real exchange rate ( rer ) has also dropped in the past few months, and is now at 94 using the 1986 = 100 index, which puts it on its average of the past fifteen years. while this figure is consistent with the estimated long - term rer, the cyclical conditions of the economy point to a level somewhat above its current values. for this reason, the baseline scenario uses as a working assumption that the rer will have a slight depreciation in the projection horizon ( figure 7 ). the widening of output gaps will also help in the process of inflation convergence. they are still relatively bounded, however, and inflation ’ s elasticity to the output gap is low. thus, at least in the context of slow growth and a gradually adjusting labor market, no fast reductions are expected in core inflation as a result of this factor. chile ’ s economic slowdown cycle of recent years is associated with several elements. the end of the commodity super - cycle has resulted in a fall in mining investment and production. the world economy has not rebounded as expected, global financial conditions facing emerging economies have tightened and local confidence levels have remained pessimistic for quite some time. this scenario has prompted a major change in relative prices. since indexation is still high, for the economy to adjust gradually, exchange rate flexibility is needed together with domestic financial conditions aligned with the new scenario. the central bank has contributed to this adjustment with an expansionary monetary policy and accommodating a sharp depreciation of the peso. one consequence of this

of credit and stable capital flows and underpins the transmission mechanisms for monetary policy. price stability strengthens financial stability. low and stable inflation provides households and enterprises with a clear indication of changes in relative prices. this makes it easier for economic agents to make the right decisions and leads to greater price stability in financial and property markets than would otherwise be the case. developments in credit and asset prices have an influence on inflation. we take this into account in our interest - rate setting. we are also aware of the potential risks to financial stability. the current low interest rates make it easy to service debt. the household interest burden, i. e. interest expenses after tax in relation to the sum of interest expenses and disposable income, is low despite strong growth in debt. the interest burden will increase, however, when the interest rate reaches a more normal level. only 14 per cent of household loans are fixed - interest loans. this is low in relation to other countries and makes households vulnerable to an interest rate increase that is higher than currently expected. compared with losses on loans to the enterprise sector, losses on loans to the household sector were low during the banking crisis at the end of the 1980s. despite high real interest rates and a decline in income, households were largely able to service their debt. high interest expenses and a decline in income, however, forced households to reduce consumption. this led subsequently to lower turnover in enterprises and weakened profitability and debt - servicing capacity. in this way, households contributed to an increase in banks ’ losses on loans to the enterprise sector. the higher the household debt burden, the stronger the potential spillover effect from the household sector to the enterprise sector. the effects of weak economic developments and / or a change in interest rates on financial stability will depend both on the initial situation in households and enterprises and on banks ’ ability to absorb losses. an analysis presented in financial stability 1 / 04 showed that a sharp increase in interest rates and a subsequent fall in house prices may increase banks ’ losses to 2. 5 per cent of gross lending. this is roughly half of what losses were at the beginning of the 1990s. the moderate increase in loan losses is due primarily to an improved financial situation in the enterprise sector. banks ’ capacity to absorb loan losses depends on their results and their capital adequacy. in the same report, we assessed the capacity of the seven largest banking groups to absorb losses by measuring how large the losses would have to be over a three - year