Chile Central Bank Statement

Author: | Published: 5 Sep 2017
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The Central Bank of Chile (CBC) became independent 28 years ago. Since then, it has pursued the objectives of keeping inflation under control and safeguarding financial stability. One of its first steps under this status was to introduce inflation targeting (IT) in 1990 – a pioneering act among emerging economies.

The Chilean macro policy framework has scored major achievements, especially after floating its currency and introducing a structural fiscal rule in 1999-2000. Important achievements include the control of inflation, reduced output volatility and a resilient financial system. A major test in this regard was the global financial crisis, which Chile weathered well. Yet the policy framework has evolved well beyond short-term management, building some institutional and financial assets the economy can now rely upon.

Confidence in the Central Bank makes monetary policy more effective, as public inflation expectations remain anchored within the policy horizon. While during 2012 to mid-2013 the monetary policy rate (MPR) was pegged to 5%, in the last three years it has remained accommodative in the face of weaker demand. All in all, monetary policy enabled inflation to remain contained within the 2-4% range most of the time, even in an environment of high international volatility.

Deepening of capital markets provides long-term funding and lower refinancing risks, owing largely to the development of institutional investors. It also enhances the efficiency of the financial system, supplementing the regulatory framework. The assets of pension funds and insurance companies add up to 94% of GDP. The foreign assets of institutional investors and sovereign wealth funds total 14% of GDP, compared to reserves of 15% of GDP in 2016.

Capital market development and macro stability lowers foreign exchange (FX) risks. Corporate FX mismatches remain limited, reducing the impact of peso depreciations. Financial derivatives usage for hedging FX risk grew from $76 billion in 1998 to $903 billion in 2013, exhibiting minor disruptions during the global financial crisis. As a result, the exchange rate can become a good shock absorber to external turbulence and make IT more effective. In 2015, the CBC resisted pressures to tighten monetary policy despite obvious inflationary pressures from a 49% devaluation in 2014-16. The FX pass-through to inflation is the lowest in the region.

All these factors ensure that the Chilean economy is well balanced and can support a pick-up in growth as external conditions improve and confidence strengthens. In the meantime, monetary policy will remain strongly expansionary, ensuring that inflation converges to its policy target.

Yet the agenda is still ongoing. Recent regulations aim at enhancing electronic transfer services. A New Banking Law focused on Basel III equity capital, adding conservation and counter-cyclical buffers, and the D-SIB capital surcharge is currently under discussion in Congress. Cost-reducing opportunities for an efficient and inclusive financial market, such as those provided by the fintech revolution, are also in the CBC's sight.




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