The 2006 report by Oxford Analytica (OA) on Monetary Policy in Chile found that the country maintains a high degree of compliance with the Code of Good Practices on Transparency in Monetary and Financial Policies developed by the International Monetary Fund (IMF). The Central Bank of Chile (BCCh) is empowered by law to develop and execute monetary policy, free of interference by the executive and legislative branches of government. The BCCh's monetary policy activities are governed by provisions of the national Constitution and the BCCh's own Organic Law. The Basic Constitutional Law specifies the BCCh's central obligations as the maintenance of price and currency stability. The IMF has raised objections to this dual mission, citing the potential for conflict, but this position has been challenged by Chilean authorities. Both OA and the IMF find that the BCCh's inflation-targeting framework is clearly explained in publications and on the BCCh website. OA applauds the BCCh's ongoing commitment to transparency as evidenced by its wide range of publications, the excellence of its public information services, and its active solicitation of the opinions of outside scholars and experts in the field. Chile subscribes to the IMF's Special Data Dissemination Standard (SDDS) and meets SDDS specifications for the dissemination of its monetary policy data.

General Overview

In a 2006 Monetary Transparency report, Oxford Analytica (OA) asserted that Chile has achieved "Full Compliance" (p. 40) for this standard, overall. The Special Data Dissemination Standard (SDDS) website of the International Monetary Fund (IMF) discloses that Chile has been a member since 1996 and first met SDDS specifications, including in its monetary data dissemination, in 2000. According to OA, the Central Bank of Chile (BCCh) is both institutionally and financially independent, "with full discretion over monetary, financial, and foreign exchange instruments" (p. 40). The BCCh's financial position has been further enhanced by provisions of the 2006 Fiscal Responsibility Law that aim to recapitalize the BCCh during years of budget surplus in order to offset debt assumed during the banking crisis of the early 1980s. These provisions call for a government transfer of as much as 0.5% of GDP, beginning in 2006 and continuing over 5 years, and should eventually allow the BCCh to retire its debt and begin generating operating profits. Specifically regarding the dissemination of monetary statistics, OA noted that the BCCh has recently changed its disclosure requirements on financial information, expanding its scope, and has pulled together once scattered aggregate monetary data, making public access to such information easier and more coherent. Chile has also come up with a detailed framework to facilitate Basel II, and has made this information available to the public. The BCCh board holds regular meetings with the Senate Finance Committee in which it advises the committee on macroeconomic policy issues, engages in productive debate, and generates useful policy feedback for the BCCh use, going forward. The BCCh produces a range of publications and disseminates information on foreign debt, inflation, balance of payments, and international reserves. These are readily accessible to the public on the BCCh website. Beginning in 2005, the BCCh Annual Report expanded its scope and content, and OA remarks on the publication that "it has evolved into a genuine management report" (40). OA also noted that the publication of the BCCh's Monetary Policy and Financial Stability Reports was formalized, so that these documents are now released according to a pre-established schedule. The BCCh has also begun the publication of the International Reserves Management Report, to be released annually, which provides details on the "composition, structure, risk-management, investment, and liquidity portfolios of the country's international reserves" (p. 40). The BCCh's Annual Report included details on the central bank's revenues and expenditures. OA noted that there is not, as yet, any publicly accessible document detailing the work of the BCCh's internal audit unit, but states that work on this is ongoing.

According to the IMF's 2008 Article IV Consultations with Chile, published in July 2008, "long-term inflation expectations remain anchored by the monetary framework, with inflation projected to return to target toward the end of the 24-month horizon" (p. 6). The report expressed the expectation that Chile's inflation would fall during the last half of 2008, in part because of the BCCh's past policy of monetary tightening. Although the BCCh approved a 50 basis point increase in the interest rate in June of 2008, the IMF found that "risks remain on the upside" (p. 6). The IMF added that the BCCh retains its focus on bringing the current relatively high rate of inflation back down to its target within the 2-year policy period. The IMF notes that current inflationary pressures, primarily occasioned by global price spikes (including recent hikes in the price of oil), should decline in coming months, albeit gradually. Given the present situation, the IMF recommends that the BCCh stand ready to implement further monetary policy measures in the event that they are required in order to "keep inflation expectations anchored firmly to the 3% target" (p. 11). Overall, the 2008 IMF report applauds the BCCh's transparency, but suggests that it could improve its communication regarding the current inflationary conditions. According to the IMF, this could be achieved by expanding the information it offers in the inflation forecast that appears in its Monetary Policy Report.

The Principles

Clarity of roles, responsibilities and objectives of central banks.

FC

In OA's 2006 Monetary Transparency Report, Chile has achieved "Full Compliance" (p. 41) with this principle. The IMF published its most recent Financial Sector Assessment Program (FSAP) covering Chile's compliance with its monetary policy transparency code in October of 2004. In this report, the IMF found that Chile achieved "a high degree of compliance with the transparency Code, including in the objectives and responsibilities of the central bank" (p. 3). According to OA, the autonomy of the BCCh is conferred upon the central bank by the Constitution and the BCCh's Basic Constitutional Law. The duties of the BCCh are laid out in the Basic Consitutional Law, which enjoins the BCCh to conduct its duties in such a way as to align with the overall aims and goals of the government's economic policy. Article 3 of the Law establishes the BCCh's primary objectives: to keep the national currency stable and to maintain normalcy in the system of internal and foreign payments. These objectives are presented on the BCCh website in a variety of publications, enabling public review and discussion. The BCCh also has a regulatory function over the financial markets, foreign exchange, and flows of international capital. Its role as the government's fiscal agent and lender of last resort is constitutionally grounded and more specifically defined in the 2006 Fiscal Responsibility Law. Foreign exchange policy is set by the BCCh board, which has the power to take action in this area.

According to OA, "although Chile operates a floating exchange rate regime, the central bank retains the right to intervene and place restrictions on foreign exchange operations" (p. 41). However, OA noted that the BCCh does not engage in such interventions. OA reported that although there is admirable clarity in the definition of much, regarding the BCCh, this is not true regarding the BCCh's latitude of choice regarding the exchange rate regime. The BCCh's historic exertion of such responsibility would be best supported by a specific legislative mandate. According to OA, the IMF has raised concerns about the dual role of the BCCh, citing the potential conflict in attempting to maintain both price and exchange rate stability simultaneously within the overarching inflation-targeting framework. However, OA noted that Chilean authorities find "no need to clarify the institutional and exclusive responsibility for foreign exchange rate policy" (p. 41). When exchange-rate policy has needed modification in the past, the Ministry of Finance (MdH) participated in the process. The policy change is reported to the Senate and made available to the public in the Official Gazette. OA reported that the BCCh's Committee of Managers has the responsibility of drawing up medium-term strategic plans covering a two-year period (the current period runs from 2006 through end-2008). The BCCh values strategic planning as a tool by which to achieve interdepartmental and inter-unit coordination in the pursuit of overall BCCh objectives. The Committee is a new creation, and the development of its mission and vision statement is ongoing.

OA found that the Constitution provides the BCCh with full authority and autonomy, "thus effectively shielding it from government intervention" (p. 42). The BCCh Charter is the near-exclusive source of the central bank's regulations, with support from the General Banking Act provisions. Historically, the BCCh's independence has been upheld in a number of judicial pronouncements. Technical and administrative autonomy of the BCCh is guaranteed by the bank's Organic Law. OA reported that "at present, there are very few concerns that fiscal policy may undermine the effective autonomy of the [BCCh]" (p. 42). The BCCh has legal authority to control its international reserves, which are carried out by the Management and Risk Evaluation Department. The BCCh avails itself of advice from the international community regarding best practice in reserve management, turning to such entities as the European Central Bank and the Bank of England.

While the BCCh's monetary policy is generally aligned with the broader economic goals of government, this monetary/fiscal policy relationship is, according to OA, only "one of coordination, subject to the primacy of central bank objectives" (p. 42). Otherwise, the BCCh's relationship to government is largely confined to its role as lender of last resort. Except in emergency situations, the BCCh is enjoined by the Constitution to refrain from making direct or indirect loans to the government. The BCCh's ability to provide grant financing or refinancing is limited by the Basic Constitutional Law to banks and financial institutions. It cannot take on government debt. The lender of last resort capability was exercised in the early 1980s during Chile's banking crisis, resulting in substantial debt accruing to the BCCh. A recapitalization scheme using government surplus dollars (up to 0.5% of GDP) is in place to retire that debt over the next several years. In addition to its previously mentioned duties, the BCCh also regulates Chile's financial markets and may take actions to maintain stability in the payments and financial systems.

The BCCh's Basic Constitutional Law establishes the bank's initial capitalization, which the board may choose to increase by majority vote. With such a vote, the board may approach the MdH to ask for an increase in capital or to "make specific contributions to its assets on account of funds to be appropriated under the Budget Law" (p. 43), according to OA. The distribution of each fiscal year's profits is also defined in the BCCh's Basic Constitutional Law, with up to 10% mandated for the BCCh's reserves and the rest normally going to the Treasury. OA reported that the IMF found that the BCCh's recapitalization scheme to deal with large debt burden it assumed following the banking crisis of the 1980s was insufficiently transparent, leading the Fund to call in 2005 for a better mechanism to deal with the issue. OA added that the authorities agreed with the generally held concerns regarding its debt, and recognized the need to restore public confidence in the BCCh through appropriate recapitalization procedures. This was facilitated through the 2006 passage of the Fiscal Responsibility Law, which created a clearly delineated procedure by which the BCCh can achieve recapitalization over a period of five years, although OA noted that there is no mandatory requirement placed on the government to participate in the procedure. An MdH study is scheduled for 2008 to assess the success of this scheme thus far.

The BCCh's role as agent on behalf of the government is defined by provisions in both the Constitution and the Basic Constitutional Law. These roles include advisory services to the president on areas of BCCh competency: monetary policy, financial matters, and foreign exchange. OA noted that the MdH may call upon the BCCh to "act as a fiscal agent in the issuing of government domestic and foreign debt" (p. 43). In addition, the BCCh may act as the government's representative in the international sphere. It can issue securities, offer credit to international entities (including states, foreign banks, and others), and with the approval of a majority of the BCCh board, it can take government and state-owned enterprise deposits at market-based interest rates.

Open process for formulating and reporting monetary policy decisions.

FC

The 2006 OA report found Chile to be in "Full Compliance" (p. 45) with this principle. The IMF's 2004 report noted that, in Chile, "the process for monetary policy formulation, implementation and communication is highly transparent" (p. 3). According to OA, the BCCh website provides public access to a detailed statement of its monetary policy framework, aims, and tools, the framework's rationale, and information regarding any changes made to its monetary policy. Chile's inflation-targeting framework is based on what OA describes as "a pre-specified, continuous inflation target band, a pre-announced 'policy horizon,' and timely communication of the authorities' inflation target forecast" (p. 45). Since 1999, the BCCh has followed a communications policy that requires it to report, in a timely fashion, on the justification, scope, and time-span for any of its activities in the area of foreign-exchange intervention. This sort of activity is undertaken only in conditions of extreme volatility or other such exceptional conditions. OA reported that the BCCh has taken such action only twice since 1999.

According to OA, the BCCh's Basic Constitutional Law confers monetary policy making authority to the BCCh's five-member board, and specifies the board's structure, function, and composition. All members serve at the appointment of the president after securing the majority approval of the Senate. Board members serve 10-year terms and can be reappointed. A minimum of three members is required to approve any resolutions, but issues of special importance may require consideration by the full board. By law, the MdH may attend board meetings but cannot vote. In cases where a board resolution does not achieve unanimous board support, the MdH may temporarily suspend the resolution while the board reconvenes to review the resolution. OA notes that "explicit legislative provisions strengthen independence of board members from short-term political pressures and allow them to give greater weight to price stability" (p. 47). However, if justification exists and the Senate approves, the president is empowered to dismiss board members. Such justification must include reference to specific violation of provisions of the BCCh's Basic Constitutional Law and demonstrable negative impact on the national economy. The BCCh website presents a detailed organizational chart of its board and other significant BCCh officials. It also provides six-month advance notice of the board's monetary policy meetings, minutes of previous meetings, and a statement of the rationale for its monetary policy choices.

OA noted that the BCCh publications offering detailed statements on monetary policy include the Monetary Policy Reports (published three times a year) and its Annual Report, published in both English and Spanish. Both include a wealth of detail, and explain the BCCh's principle operations, policies, external audit information, research relevant to monetary policy, and a wealth of other, related information. According to OA, in 2005 the BCCh enhanced the Annual Report's already highly informative content, thus "helping it to evolve into a genuine management report" (p. 47). OA also noted that the BCCh has achieved recent improvements in both the quality and timeliness of its publicly available information, including information on board activities, employing both its own website and press releases. Board meeting minutes include the positions taken by individual board members, but this practice is currently the subject of debate. The BCCh also publishes its Background Information Report, in which it provides deep context through statistics, analysis, and forecasts. Also accessible on the website are speeches and documents by board members that cover a variety of topics.

BCCh publications have earned the praise of market participants, according to OA. Among the many periodicals offered for public consumption are the Monetary Policy Report, the Financial Stability Report, and the International Reserves Management Report, all of which must be presented to the president and the Congress according to an established publication schedule. OA observes that the Monetary Policy Report has been widely recognized for the high quality of its content. The BCCh also publishes a Monthly Report dedicated to a detailed discussion of statistical information relevant to monetary policy and other BCCh's activity. OA added that the Monthly Progress Statistical Report "includes information on the international economy, monetary base and aggregates, economic activity, expenditure and statistics" (p. 47). Another BCCh publication is the Daily News, which covers information on monetary policy and foreign exchange. The BCCh also publishes a book series entitled Central Banking, Analysis, and Economic Policies, which can be accessed online. According to OA, "this series publishes new research on central banking and economics in general, with special emphasis on issues and fields that are relevant to economic policies in developing economies." (p. 48). In addition, the BCCh offers online access to its Working Paper Series, dedicated to encourage broad public discussion of issues and analytical tools in the field of monetary policy and other central bank activities. Contributions from scholars and independent experts are actively sought for inclusion in this series. Finally, the BCCh makes a variety of publications directly dealing with national statistics, including National Accounts and a publication entitled Balance of Payments and External Debt. To facilitate, public engagement with the BCCh, the Basic Constitutional Law establishes procedures by which the BCCh's decisions may be appealed. The public can submit comments on the BCCh's decisions or weigh in on issues currently under discussion via the central bank's website.

Public availability of information on monetary policy.

FC

The 2006 OA Monetary Transparency Report on Chile found the country to be in "Full Compliance" (p. 50) with this principle. The IMF's SDDS website discloses that Chile is a subscriber to the Standard and meets its specifications for the dissemination of monetary data. The IMF's 2004 report noted that, in Chile, "an extensive set of publications is available on the web-site" (p. 4). According to OA, data dissemination requirements are delineated by the BCCh's Organic Law, which stipulates that the BCCh must "compile and publish in a timely fashion the main national statistics, including monetary and exchange statistics, the balance of payments, and the national debt, as well as other general economic and social indicators" (p. 50). The BCCh has been praised for the reliability of its data. OA reported that the BCCh's board put an internal regulatory change through in 2006 in order to bring its reporting of macroeconomic statistics into closer alignment with international financial institutions. These changes address both methodological and categorizational concerns and extend the scope of coverage. Coverage of the BCCh's operations is offered in detail in both the Daily News and the Monthly Report. The topics addressed in this coverage run the gamut of the BCCh's activities, from open market operations and regulatory changes to trade data and foreign exchange interventions. The BCCh produces an advance release calendar for data release on its website and keeps the calendar updated monthly. The website also offers the public a calendar of BCCh events. The BCCh has successfully reduced the time-lag for the publication of its Monthly Indicator of Economic Activity to 35 days. The bank also grants public access to its monthly and annual balance sheets and its annual income statement. Its financial statements include the opinion of external auditors and are published in both the Official Gazette and national newspapers. OA noted that the data provided in these statements is detailed, including data on assets and outstanding liabilities. The BCCh also publishes information relating to its lender of last resort function via press releases and the Daily News. This information is also available in the BCCh's income statements and on the BCCh's balance sheets.

OA found that "the central bank maintains good public information services and has continued to improve the quality and amount of information publicly available on its website" (p. 51). Transparency and accountability enhancements are ongoing at the BCCh. In 2004, the BCCh created its Communications Department to better facilitate contacts with both the media and end-users of its information. The BCCh's website offers access to all press releases and a wide range of monetary policy related publications. Among the latter are: Central Bank Economic Policy Documents; Central Bank Working Papers; and Chilean Economy Magazine, along with the BCCh's Annual Reports and its Monetary Policy Reports. Access is also provided to relevant regulations and legislation, and to the Chilean External Debt Report. In 2006, the public could also use the website to access the BCCh's information on international reserves, along with explanatory information, via the annual International Reserves Management Report, which has received high praise. However, OA noted that as of 2007 the report would be appended to the Annual Report as an Annex. OA found that the BCCh's subscription newsletter service is reliable, and contains not only economic information but also informs the public of the availability of newly published reports and scholarly articles. The handling of sensitive information is an issue that the BCCh is actively addressing. However, the IMF's SDDS website does not disclose any specific legislation that mandates confidential treatment of BCCh's data. Rather, the SDDS merely notes that such information is "considered confidential."

Accountability and assurances of integrity by the central bank.

CP

According to the 2006 OA report, Chile has attained "Compliance in Progress" (p. 52) on this principle. The IMF's 2004 report observed that "accountability for the conduct of monetary policy is ensured by virtue of the fact that the Bank is to inform the President of the Republic and the Senate in the performance of its duties, its policies and any regulations having general applicability" (p. 4). The OA report noted that the BCCh must submit a report on policy and program execution to the MdH and the Senate every year. In addition, the board holds regular meetings with the Senate regarding macroeconomic policy both in order to inform the public authorities and to gain feedback on its policies. OA noted that the Senate technical ability to exercise oversight in this regard could stand improvement. The BCCh is also required by law to report to the MdH and the Senate on current-year achievements as well as on proposals for new policies and programs for the year to come. Although not legally required to do so, the BCCh also continues its practice of submitting quarterly evaluations of its progress in the policy area, including its explanation as to the rationale behind its policy choices. The BCCh also reports on international reserves, liquidity, and its balance sheet to both the executive and legislative branches. Beginning in 2006, the BCCh instituted an official policy of reporting on monetary issues to both the president and the Senate.

OA noted that the BCCh annually publishes its financial statements, including a statement by the external auditors. The internal audit function is controlled and supervised by the BCCh's General Auditor (who reports to a Chief Auditor), who must submit a written report to the BCCh's board. This report must include any objections raised by the audit with regard to the BCCh's accounts and its operations. The report is also forwarded to the external auditor. OA noted that, as of 2005, "the role of the General Auditor was reinforced to become more proactive in the areas of risk management, internal monitoring and corporate governance" (pp. 52-53). The BCCh has sought to strengthen its internal audit function through the active recruitment of trained staff. The Chief Auditor is directly accountable to the BCCh's board. External auditors are chosen from a list of registered firms (in 2005, it was Ernst & Young).

The BCCh's official code of conduct is contained within the Organic Law, and its provisions extend to all BCCh's employees as well as the members of the board. Activities considered to be incompatible with board membership are listed in great detail. The code includes considerations of conflict of interest. OA noted that the BCCh issued a formal document entitled Ethical Standards and Secure Information in 2003, the provisions of which are binding on all BCCh officials. OA found that public availability of "the norms governing the ethical and personal conduct of staff is still weak" (p. 53) and cited an IMF recommendation that the BCCh publish its internal rules on its website. According to OA, in 2005 the BCCh eliminated its International Division and replaced it with a Financial Operations Division, which was tasked with interacting with both the domestic and international financial markets. The BCCh's ongoing organizational changes are designed to comport with international best practice for central banks. OA adds that "preferential development of human resources, transparency in budgetary management, and support for clear ethical rules, together with priority for identifying and controlling the risks inherent in [BCCh] functions and responsibility, are among the most relevant guidelines provided by the central bank" (p. 53).