its growth. there is abundant evidence of the harmful effects of inflation on long - term growth ( barro, 1995 ; de gregorio, 1995 ). but, why does inflation tend to be higher when the central bank is not autonomous? to begin with, there is a need for public expenditure financing. there are various reasons why there is always pressure to increase public spending. many of them are well - known and it is beyond the purpose of this presentation to discuss them. the truth that this tendency to raise public spending combined with the fact that the inflation tax is easy to collect, creates a natural pressure towards higher inflation. numerous episodes where fiscal objectives have dominated price stability goals have resulted in significant inflationary spirals, which are very costly for society. this fact is wellknown in chile and in the rest of our region. a second element behind the inflationary bias has to do with the so - called dynamic inconsistency problem. in parallel with the tendency of the government to increase public spending comes the incentive to boost economic activity above sustainable levels. there are several reasons for this to occur. potential market failures may result in a less than socially optimal output level, or political cycle motives can lead the central bank to try to boost economic activity beyond the level believed to be sustainable in the medium term. how can the government ( the central bank ) generate a higher output level? by surprising economic agents with a higher than expected inflation rate. the inflationary surprise increases aggregate demand and output. however the public fully understands this situation, so the final result will be higher inflation and output at the same level as it would have reached without the inflationary surprise. inflation cannot generate permanent increases in output. in other words, more inflation is created but not more activity, which reduces welfare. granting autonomy to the monetary authority has been a way to establish a credible commitment with price stability while, at the same time, allowing it to implement a monetary policy that helps to smooth the business cycle. to the extent that the central bank is independent of the government ’ s financing needs, the inflationary bias that is attributable to financing a recurring public deficit will be eliminated. in addition, increasing the horizon of a central bank, which is related to greater independence, reduces the dynamic inconsistency problem because its interaction with economic agents is repeated over time. within this context, the central bank ’ s reputation acts as a self - regulating mechanism for its behavior. therefore, the longer the planning

and productivity show below - trend growth rates, so potential growth is lower than trend. thus, potential gdp growth is now estimated to be around 2. 5 %, compared to the 2. 5 % to 3. 0 % we estimated in september 2016. with this, the current activity gap is somewhat narrower than previously estimated, even considering that the evolution of gdp has also been somewhat lower ( figure 9 ). for the purposes of monetary policy, the evolution of the activity gap is still consistent with an economy needing an important monetary impulse throughout the projection horizon. in addition, the board continues to estimate the neutral interest rate to be between 1 % and 1. 5 % in real terms. in our baseline scenario, we continue to forecast that gdp will gradually regain higher expansion rates, backed by favorable external conditions, the end of the mining investment adjustment, no big macroeconomic mismatches and a clearly expansionary monetary policy stance. this scenario also assumes that fiscal policy will remain on its consolidation path, expressed in the immediate future in the upcoming budget aligned with the administration ’ s commitments. all this in a context in which potential growth steadily approaches trend - consistent levels. accordingly, our projections show no major changes compared to our june estimates. for this year, we foresee that the economy will grow between 1. 25 % and 1. 75 % ( 1 % to 1. 75 % in june ). for 2018, we continue to expect growth to pick up, to a range between 2. 5 % and 3. 5 %, identical to our june forecast. on the expenditure side, our growth forecast for private consumption is slightly adjusted upward in 2017, considering the rebound of the real wage bill observed so far, the recovery of confidence indicators, the necessary replenishment of durable goods inventories and an appreciation of the real exchange rate. in investment, the downward adjustment of projections for 2017 stems primarily from construction, including the mining, infrastructure and housing components. this latter one because of the high stock of new homes for sale that still persists. thus, by 2017 a contraction of this component of gross fixed capital formation is expected, while the machinery and equipment component is slightly adjusted upwards, reflecting the actual data to date and also the steady growth in imports of capital goods excluding non - regular transportation. externally, exports are forecast to contract this year as a result of some supply - side shocks in manufacturing and mining downtime in the first half of the year, which has already been reflected in lower shipments from