to international financial markets, but it also faces significant challenges. there are several other factors that could cause new or intensify ongoing episodes of financial volatility, including the uk referendum to define whether it stays in or leaves the european union, and a number of electoral processes under way around the world that could cause a shift towards protectionism. however, the consolidation of economic growth in europe and the united states could contribute to boost world activity. the possibility of the oil price ’ s upward trend continuing or steepening is another risk to the baseline scenario, because of both its direct impact on local and world inflation, and its implications on global growth. but there are also reasons for this price to recede to its levels of earlier months. actually, inventories are historically high. at home, although inflation has diminished as expected, its high level for many quarters already is still an important risk in the baseline scenario. in the short term, its evolution is still closely tied to the exchange rate and therefore to the risks coming from abroad. for activity, the risks outlined in previous quarters persist. confidence remains pessimistic and the chilean economy is receiving a milder impulse from the world economy than it did in earlier years. the recent evolution of the labor market stands out. if it deteriorates more sharply or if the world economy acquires a more adverse configuration, this might result in lower gdp growth than forecast. conversely, if the labor market makes smaller adjustments and / or the external economy remains fairly calm, output may perform better than expected. this could translate into stronger consumption growth or more favorable investment, or both. upon assessing these risks, we estimate that the risk balance is unbiased for both output and inflation. to sum up, the macroeconomic scenario is, broadly speaking, the same as march ’ s. inflation will return to the target range in the coming months and output will continue to post bounded growth. investment, however, will be worse than we expected before. the external scenario continues to present risks and new volatility episodes will probably occur in the financial markets. now let me turn to our financial stability report ( ief ). financial stability report our financial stability report is released in june and december of each year, containing recent macroeconomic and financial developments that might affect the chilean economy ’ s financial stability. this report ’ s external scenario includes the same risks i just described when examining the monetary policy report, particularly with respect to the us monetary policy and the evolution of

rodrigo vergara : the monetary policy report and the financial stability report presentation by mr rodrigo vergara, governor of the central bank of chile, before the finance commission of the honorable senate of the republic, santiago de chile, 6 june 2016. * * * both the monetary policy report of june 2016 and the financial stability report of the first half of 2016 can be found at http : / / www. bcentral. cl. introduction mr. president of the senate ’ s finance commission, senator andres zaldivar, senators members of this commission, ladies and gentlemen, thank you for your invitation to present the central bank of chile ’ s vision on the recent macroeconomic and financial developments, prospects and implications for monetary and financial policy making. this vision is contained in detail in our monetary policy report of june 2016 and our financial stability report of the first half 2016. over the last few months, the economy evolved in line with estimates in our march report. inflation declined to 4. 2 percent annually and our new baseline projections – which i will share with you in a moment – indicate that it will return to the tolerance range within a few months. on economic activity, first - quarter gdp growth outperformed our march forecast. however, this year ’ s outlook foresees that it will remain below potential still for some quarters. the world economy continues to be marked by expectations about the federal reserve ( fed ) ’ s decision on the trajectory of its monetary policy normalization, and by the risks coming from the chinese authorities ’ efforts to meet the country ’ s target growth rates. during most of the quarter, the markets ’ assessment of these phenomena resulted in a loosening of financial conditions compared with the beginning of the year. most recently, however, these trends have been partly reversed. thus, our new baseline scenario assumes that our trading partners will post similar growth rates to those of 2015, but external lending conditions will be tighter and commodity prices will remain below their long - term levels. in this context, we have held the monetary policy rate ( mpr ) at 3. 5 percent annually and we foresee that, within our forecast horizon, further increases will be necessary. of course, this will be contingent on incoming information about the projected inflation dynamics. thus, if new indicators point at higher expected inflation, monetary policy will need to be tightened, and vice - versa. in any case, we have maintained a significantly expansionary monetary stance, which will remain so in the scenario we believe