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.