The big news of the week had to do with, first, the Central Bank's rate hike and, second, the publication of the September Monetary Policy Report, which provides a broader basis for that decision.

In case you have not seen it, here is a summary: The Issuing Authority increased its growth estimate for 2021 to the range 10.5% - 11.5%, due to a greater expansion of consumption (private and government), encouraged by state aid, greater liquidity, and deconfinancing processes. The above, in a context of supply restrictions, exchange rate depreciation and rising costs, also led to an adjustment of the inflation forecast from 4.4% to 5.7% by the end of the year. In response, the Board decided to increase the TPM by 75 bps, to 1.5%, increases that would continue in the next meetings, both in 2021 and 2022.

Admittedly, I was surprised by this. If you read my last column, you will have noticed. But if one assumes that the Central Bank's macroeconomic scenario is correct, it is difficult to counter-argue its decision and, above all, the tone it sets for the future path of monetary policy. With respect to June, there has been a higher than projected household spending scenario, which adds to the expansion of state aid and a higher than estimated marginal propensity to consume (i.e., the percentage of income devoted to consumption) of the average population. If we add to this a high level of liquid balances, whether in checking or sight accounts, which have not been used to complement other sources of savings, we can assume that the dynamism of consumption will continue.

Additionally, the exchange rate has depreciated in circumstances where macroeconomic fundamentals would indicate that it should have appreciated. And we are not only talking about against the dollar, as this should have occurred on a multilateral basis as well. Many indicate that this would be imported inflation, which is far from being true. The exchange rate depreciation is, in the correct words of the Central Bank, idiosyncratic. I recognize the courage of the Institution, as it is very difficult to be this correct in a situation where none of the other actors are correct (in particular certain sectors of the parliament). The depreciation is due to local uncertainty, to changes in the rules of the game, to the decapitalization of the financial system and to the possibility that the local political and economic institutionality may end up crumbling. Is that international? I doubt it.

Given the above, approximately 75% of the reasons for higher inflation would be local. The other 25% would be international, but given their interaction, the percentages probably overlap quite a bit, considering that, for example, many inflationary pressures on supply are often not passed on to final prices because demand does not provide the conditions to do so. A cost increase is not always passed on to the consumer: it is eaten up by margins. A transitory increase in demand does not always cause higher prices if inventories are high and competition among firms is high. Therefore, it is the context as a whole that is causing inflationary pressures and we cannot turn a blind eye to it.

Consequently, following its constitutional mandate and making use of its powers, the Council decided to raise the TPM by 75 bps, to 1.5%, sending a message of concern going forward and making it clear that further hikes will be necessary. How much more? Quite a bit more. So much so that it is highly likely that in March 2022 the policy rate will be around its neutral level (3.25%) and then exceed this value for a few quarters.

Finally, warning signs. Since some, who should stop looking at the speck in someone else's eye and see the plank in their own, have acted outside their competence, the inflationary and financial situation could spiral out of control. A fourth (or total) withdrawal, fiscal non-convergence or other creative measures along these lines would cause imbalances that NO Central Bank in the world would be able to offset. In the words of the same report, it is mentioned that "The Central Bank will act in accordance with its mandate to control inflation, a task that will be less costly to the economy to the extent that other actors contribute to restoring macroeconomic balances that have been lost during the pandemic." Hopefully the country's last bastion of economic sanity can open the eyes of the rest.

Nathan Pincheira 

Chief Economist of Fynsa