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 meet this target, 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 employment and domestic output.

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

The Monetary Policy Report is published three times a year, in January, May and September, and focuses on the main factors that influence inflation. 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. The Report also provides several boxes that offer more detailed information on issues relevant to evaluating inflation and monetary policy

The Board approved this Report at its meeting on 31 August 2007 for presentation to the Senate’s finance commission on 5 September 2007.