Transcript of Question & Answer Session Universidad De Chile Conference on Central Bank Independence, Mandates and Policies

Okay. Now we have a couple of minutes left. I know that we are very close to the allotted time for this panel, but I think that Jose De Gregorio, we have a question for you taken from the ones that came from the audience. But I would ask you to keep short the answers so as not to eat time from the next panel.

Yes, I think that the most important issue today, and most people are asking everywhere, is what's your view on the challenges of monetary policy and central banking facing this inflationary shock as we are living in the pandemic. So I think that, it's quite a first order issue in monetary policy today around the world. So if you can tell us something about your views and what views that later on we'll know from your central bank decisions.

I'll just be very brief, Jose. So certainly, we have spent how many of the past decades where the public didn't think about inflation. Inflation was low and stable. Central bankers were paying more attention to, at least in the case of the US, trying to make sure inflation was hitting their 2 per cent inflation targets. And you contrast that today, where now we have the public quite attentive to the levels of inflation that are coming out of this recovery with labour shortages and supply constraints, and central banks trying to refocus people on the long run as opposed to the short run.

So it is a very challenging time in judging what is a near term issue as it relates to inflation versus a long term issue. And at the same time, not wanting to take our eye off as what is a central mandate for us and that is making sure that we achieve price stability over the long run. So indeed challenging and something my colleagues and I are spending a lot of time, both in a communication standpoint, as well as assessing the risk to the long run outlook for the economy.

Thank you very much. Alejandro, Philip, did you want to say anything?

Yes, I would just say very quickly, this is a very peculiar shock that we are facing. This is not the traditional supply shock. I think the pandemic is a very peculiar shock that is introducing not only these bottleneck issues on the supply side, but also a significant shift from consumer expenditure, household expenditure towards durable goods. So we are spending less in services and more on durable goods. How long will that shift in demand take to process? How the price dynamic that will be? I think that is an open challenge. We are of the view that the shocks are to be transitory. Nonetheless, the risks for inflation have increased. The policy space, as in the fiscal side and the monetary side, something similar. As emerging markets, we have significantly less space than advanced economies.

We have not had inflation below our targets for the last 20 years or so. So in our case, we have to be more mindful about price formation and the contamination of inflation expectations. And that's why we have been, I would say, trying to reduce monetary accommodation already as a way to improve our chances of having an orderly adjustment and not having inflation expectations being contaminated.

Thank you very much, Alejandro.

Okay. And I agree very much with Esther's assessment. We're clearly seeing a spike in inflation at the moment. Broadly, we understand why that spike's occurring. Whether the spike turns into a permanent lift is going to depend really on what happens in the labour market. I don't think we're going to have sustainably higher inflation unless we have sustainably higher wages growth. And that's, for me, where the big open question is at the moment – how are the labour markets and wages growth going to respond to the spike in inflation? Is it going to reset expectations about what type of wage growth people should get or will the spike dissipate and we'll go back to the type of labour market outcomes we were seeing before the pandemic? So there's quite a lot of uncertainty around that issue. So that's what we're watching very carefully.

Thank you very much, Phil.