Description

The main purpose of the Central Bank of Chile’s monetary policy is to keep inflation low, stable and sustainable over time. Its explicit commitment is to keep annual CPI inflation at around 3% most of the time, with a tolerance range of plus or minus one percentage point. To this end, the Central Bank uses monetary policy to keep projected inflation at about 3% annually for a policy horizon of around two years. Controlling inflation is the means by which monetary policy contributes to the population’s welfare. Low, stable inflation improves economic performance and growth, while preventing the erosion of personal income. Furthermore, monetary policy’s focus on inflation targeting helps to moderate fluctuations in domestic output and employment.

The main purposes of this Monetary Policy Report are: (i) to report and explain to the Senate, the government and the general public the views of the Central Bank of Chile’s Board Members on recent and expected inflation rates and their consequences for the conduct of monetary policy; ii) to publicly disclose the medium-term analytical framework used by the Board to formulate monetary policy; and (iii) to provide information that can help guide economic agents’ expectations regarding future inflation and output trends. This Report complies with the requirement under the Bank’s Basic Constitutional Act to report to the Senate and the minister of finance (Section 80).

Beginning with this issue, the Monetary Policy Report is published four times a year, in March, June, September, and December, and focuses on the main factors that influence the inflation trajectory. These include the international environment, financial conditions, prospects for aggregate demand, output and employment, and recent price and cost developments. The last chapter summarizes the results of this analysis in terms of both prospects and risks affecting inflation and economic growth over the next eight quarters. Several boxes are included to provide more detail on issues that are relevant for evaluating inflation and monetary policy.

This Report was approved at the Board’s session on 16 December 2009 for presentation to the Senate Finance Committee on the same date.