Chile Central Bank Statement

Author: | Published: 19 Oct 2018
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When the Central Bank of Chile (CBC) became independent nearly 30 years ago, it had to deal with substantial legacy issues. First and foremost, it had to control a high and volatile inflationary environment resulting from fiscal dominance over monetary issues. Since the mid-1990s, the CBC has pursued this goal through a flexible inflation targeting regime, under which rates are set to achieve 3% inflation within a policy horizon of two years, allowing temporary deviations in order to accommodate shocks. Its success can be attested by noting that inflation has in fact averaged about 3% in the last two decades, and that expectations at the two-year horizon have remained well-anchored at the target despite frequent shocks affecting short-term price dynamics.

A second challenge was dealing with the aftermath of a full-blown banking crisis experienced in the early 1980s. This crisis fuelled one of the largest recessions of the country's history and required a major bailout of the banking sector by the CBC. To prevent similar events in the future, and to take the appropriate actions should they occur, the CBC also has an explicit objective of financial stability, which it implements together with other regulatory counterparts in specific areas under its competence. Finally, the adoption of institutional autonomy under a non-democratic military rule posed a major challenge of legitimacy.

In dealing with its mandates of price and financial stability, the CBC has pursued a strategy based on three pillars: institutional independence, focus and transparency. Institutional independence has been achieved through a rotating body of governors whose 10-year tenure and sequential appointments are designed to break the dependence from the political cycle. The focus on two main, non-competing, objectives of price and financial stability has also been critical to the institution's success. In fact, the CBC does not aim to achieve a dual employment-inflation mandate, understanding that the determinants of long-term growth are unrelated to short-term monetary stimulus. Indeed, a low and predictable inflation environment within a well-regulated financial system is seen as the main contribution that the CBC has to offer to such long-term growth determinants.

Lastly, the CBC is responding to new social and political standards of transparency and integrity well beyond provisions currently written in the law. As part of this effort, the CBC holds regular conferences and public events to both learn from its peers and interested counterparties, as well as to communicate its objectives, tools and outcomes in several dimensions. The priority given to transparency, accountability and the predictability of its decisions reflects not only the CBC's appreciation of these values in their own right, but the recognition that trust from the public is indeed the main asset that allows inflation expectations to remain anchored despite the frequent shocks experienced by our small and open economy. Public opinion surveys situate the CBC's performance as a positively evaluated institution, regardless of respondents' political beliefs. Being able to understand the new challenges and to ensure a contribution to economic stability and people's welfare is one crucial way to remain trustworthy.