Established in 1925 under the presidency of Arturo Alessandri Palma, the Central Bank of Chile has played an important role in the development of the country’s economic history.

Since 1989, the Bank has been governed by a constitutional act that defines its primary objective as safeguarding the stability of the currency and the normal operation of the internal and external payment systems.

In the thirty years that the Bank has operated under the current legal framework, inflation has for the most part been low and stable, economic volatility has decreased, and there have been no major disruptions in the financial system. The Bank’s contribution to these achievements demonstrates the concrete support that the institution provides to the country’s development and the quality of life of its citizens.

The same constitutional act assigns additional functions to the Central Bank, such as regulating the quantity of money in circulation and credit in the economy; issuing banknotes and coins; regulating the financial system; generating and compiling macroeconomic statistics; managing international reserves; acting as fiscal agent; and controlling foreign exchange operations.

In 2018, a new Strategic Plan was launched, based on an extensive internal and external dialogue. The Strategic Plan is an essential management tool for aligning the Bank’s efforts and resources with specific institutional priorities that reflect the new challenges facing the organization.

The Central Bank of Chile aims to perform its functions efficiently, in a framework of increasing transparency of its actions and the consistent application of criteria and policies in line with best practices..

The Annual Report is one of the mechanisms through which the Central Bank reports on its performance to the public. This is an important process, given that it is the citizens of Chile, through their representatives, who have entrusted the institution with fulfilling its mandates.

In accordance with the stipulations of the Basic Constitutional Act, this document describes the Bank’s activities in the year, reporting on the execution of policies and programs developed in the period. It also includes the financial statements, with their respective notes and the external auditors’ opinion.

The Bank has decided to strengthen the content of its annual report, in order to provide a more comprehensive account of its performance that covers the different areas and scope of its activities and that is more accessible to the general public.

The 2018 *Annual Report* represents a first step in this direction, to be expanded in 2019, adhering to the highest international standards.

1.1 LETTER FROM THE GOVERNOR

We live in an era of fast, disruptive global change. Any organization, whether public or private, must be prepared to respond to the demands of this shifting scenario.

These accelerated changes represent a particularly important challenge for public institutions, which are generally expected to be stable and predictable. At the same time, their effectiveness depends on the confidence of people and markets. In a social environment that has become more attentive and more sensitive, institutions are expected to respond quickly and effectively to any sort of contingency.

Communication is essential for navigating this complex landscape. It is a critical tool for better understanding the changing world, complementing the available information, determining future actions, and explaining the reasoning behind decisions and the scope of the expected impact.

Like any major institution, the Central Bank is challenged by the new scenario, where institutional confidence and legitimacy are put to the test daily. In response, we have developed a strategic planning process that articulates the necessary steps for facing the new challenges in the economic, technological, organizational, and communicational spheres.

The 2018–2022 Strategic Plan was developed through a consultative, participatory, and inclusive process, precisely because we understand that the Central Bank is part of society. We work for the country as a whole and depend on the people who live here. This spirit has continued to motivate the plan throughout the first year of implementation.

This annual report describes the Central Bank of Chile’s performance in 2018 from a different perspective than in the past. This year, we have incorporated financial and nonfinancial information, giving them the same weight at the organizational level. This is the start of a transition toward a broader, more integrated, and more readable report, to reflect the variety of functions performed by the Bank and the diversity of perspectives from which it can be evaluated. In particular, we focus on the mission, vision, strategy, and projections that make the Central Bank sustainable over time.

We are aware that the different actors with which the Bank interacts—markets, analysts, authorities, opinion leaders, private citizens, investors, international organizations—have different perspectives of our organization and different informational needs. We have therefore set ourselves the challenge of developing more and better tools for responding to these needs, so as to reduce information asymmetries and determine how best to incorporate the concept of sustainability in the organization.

From this broader perspective, we can review some of the highlights of the Central Bank’s performance in 2018.

This year, a new scheme was applied to monetary policy formulation and communication. This involved reducing the number of Monetary Policy Meetings to strengthen the analysis and decision-making process, as well as the communication of the resulting decisions. The previous sixteen press releases per year were reduced to eight, four of which accompany the publication of the Monetary Policy Report. In addition, the presentation of the Monetary Policy Report now includes a press conference and a number of presentations in different cities across the country.

The publication of the Financial Stability Report was separated from the Monetary Policy Report, with the corresponding presentation to the Senate Finance Committee. Specific diffusion activities were also added, given the importance of this topic for the market, specialists, and new audiences.

The reports were complemented with more in-depth studies on important macroeconomic and financial topics, which has contributed to extending our horizon of analysis. This includes two new chapters in the Financial Stability Report, on New Information Technologies in the Financial Industry and on the Real Estate Market, as well as a supplement on the Labor Market published with the December Monetary Policy Report.

Thus, in a complex period of increasing global uncertainty, the Bank has been able to strengthen its position as a trusted authority for economic agents and for society at large. It has contributed, through its monetary and financial policy decisions, to reinforcing the dynamism and resilience demonstrated by the Chilean economy in 2018 and, through its analysis, reports, and statistics, to promoting a better understanding of the economic phenomena that affect people and businesses.

In the interest of complying with the highest standards of transparency, the full record of the Monetary Policy Meetings was published for the period 2000–2007.

Another important highlight was the publication of new statistical series for the securities market and foreign direct investment by region and the spliced series for the mining and nonmining Imacec and regional GDP.

The new 2017 Household Finance Survey was also released in the year. The survey is an interdisciplinary work that acknowledges the important role of households in the financial system and contributes to a better understanding of household behavior.

In the year, we worked actively on the issues of cybersecurity and operational risk in the financial industry. Our experience and knowledge have been applied to help address the problems faced by banks in the system, as well as to collaborate with bodies such as the Financial Stability Board and the National Congress.

Also in 2018, the Bank launched a Technology Observatory, as contemplated in the Strategic Plan. The aim of this initiative is to strengthen the Bank’s capacity for understanding the scope of disruptive technologies in its own operations and in areas under its jurisdiction, such as financial stability and statistics.

Another important issue in 2018 was financial education, an essential tool for helping people make informed decisions that safeguard their wellbeing and quality of life and also supporting the stability of the financial system. In addition to our usual activities, we worked in conjunction with five ministries and seven public institutions to develop and approve of the National Financial Education Strategy. We also launched the City of Opportunities, an online course for high school teachers; 300 accredited teachers participated in the first program .

In the Treasury area, following the successful elimination of the one and five peso coins, the Bank began the gradual removal from circulation of the old 100 peso coins from the market, to reduce the coexistence of two coins with the same denomination.

While this is not an exhaustive list of the Bank’s achievements in the year, it does show the extent of the steps we are taking to adapt to the challenges and uncertainty that characterize the new scenario, as well as our sense of responsibility to the entire country in fulfilling our constitutional mandate.

For 2019, we expect to continue the implementation of the Strategic Plan, completing, consolidating, and complementing some of the initiatives launched last year. Some key developments in this regard will be the full transition to the organization’s new divisional structure; the evaluation of the performance of monetary and financial policy by a panel of international experts; the implementation of the new employee value proposal; and progress on the regulatory simplification process for foreign exchange operations.

With regard to the Bank’s usual work, important tasks in 2019 include the revision of the structural parameters that provide the framework for monetary policy, the implementation of the new General Banking Law, the execution of the 2018 Benchmark Compilation of the National Accounts, the implementation of a new benchmark for international reserves; the full removal from circulation of the old 100 peso coins; and the implementation of a new policy on the disposal of damaged banknotes.

Finally, 2019 marks the Central Bank’s thirtieth year as an autonomous institution and the culmination of the long process of paying off the subordinated debt deriving from the 1982–83 financial crisis. These milestones provide an opportunity to find inspiration in our history as we look to future challenges.

I invite you, then, to view the Central Bank of Chile from a new perspective, one that combines the annual performance report with an understanding of how the Bank’s purpose and objective affect future generations.

1.2 LETTER FROM THE GENERAL MANAGER

The Central Bank of Chile’s Basic Constitutional Act assigns the General Manager the responsibility for the day-to-day management and oversight of the institution and specifies a series of powers and functions, in addition to instructions from the Board.

To fulfill this role, the Bank’s management has, for several years, participated actively in the five-year strategic planning process so as to orient the way the Central Bank achieves its objectives and mission.

Each new Governor leads a strategic planning process that is implemented starting in the second year of his term and carries over through the first year of the next Governor’s term.

Under the leadership of Governor Mario Marcel, the 2018–2022 Strategic Plan is grounded on the Bank’s vision of being a trustworthy technical institution, known for its high standards in achieving its institutional objectives. These objectives, in turn, are related to the Bank’s mission of safeguarding price stability and the normal operation of the internal and external payment systems.

In 2018, the organization focused its efforts on achieving its established objectives. At the same time, we started implementing the Strategic Plan so to move forward on the priorities and initiatives proposed for the Bank, while ensuring that this did not in any way change or interfere with the work we do every day

These priorities and initiatives were established based on the identification of the key challenges the institution will face in the coming years, such as the complex global macroeconomic scenario, the integration of the financial markets, and changes in the makeup of the major global economic blocs, all of which have an effect on the orientation of monetary policy and the monitoring of financial risks. Other factors taken into account include the clear deterioration in people’s confidence in some public institutions and the impact of the fast-paced technological changes throughout the world.

The Strategic Plan aims to strengthen the Bank’s intellectual leadership; its understanding of and dialogue with the wider community; its corporate governance, with an eye to balancing risk tolerance and business process efficiency; its capacity to understand, manage, and incorporate technological changes; and its position as an employer of excellence. These priorities represent points for mobilizing the institution and creating greater clarity regarding the road we want to travel.

In 2018, we made concrete progress in a number of areas, including the following: the management structure necessary for facing these challenges; monetary policy diffusion and the decision-making scheme; expansion of the analysis, evaluation, and effectiveness of financial policy; comprehensive research that contributes to a better understanding of economic phenomena; an increase in statistical standards; cash management; transparency; and community relations.

We have been able to securely face the challenges that are increasingly emerging in the area of cybersecurity, without limiting our options for adopting new technologies.

The Bank has a high-quality team, in terms of professional, technical, and personal qualifications, for achieving the Bank’s public role and institutional mandate. Moreover, the team’s actions are always framed in the context of the institutional values of commitment, respect, transparency, integrity, and excellence.

This Annual Report provides a detailed account of the Bank’s performance in 2018, using a comprehensive and accessible approach. It represents a first step toward the objective of ensuring that this public accounting process is in line with the highest international standards for this type of report.

The Bank is fully aware that by meeting its objectives, it is contributing to the well-being of all Chileans. This is why we are dedicated to continuously improving the work we do. Along 2019, which is now well underway, we will redouble our efforts to adequately face the new challenges.