Next week, particularly on Wednesday, the Central Bank will publish its March Monetary Policy Report, probably one of the most awaited in recent times. The economic scenario during the last three months has changed quite a lot, not only because of the data we have known about the local economy (mainly inflation) but also because of external developments, especially Russia's invasion of Ukraine.

In this regard, the conduct of monetary policy has had to adjust along the way, with significant increases in the TPM and a message that points to more hikes in the immediate future. While this is not new, in terms of the direction, it is new in terms of the magnitude of each of these adjustments and the "terminal" level of the rate. To give us an idea, a few months ago, the market discounted that the TPM would reach 6%, while today it is projected to exceed 10%, which would lead us to have a more contractionary monetary policy than even during the Asian crisis (the rate was higher, but in comparable terms it was less contractionary). The above, in order to face the high inflation that our economy is currently experiencing, which is almost 8%, but which will most likely exceed 9% (both in year-on-year comparison) by mid-year.

However, we must be careful about starting to demand from the Central Bank something that may start to be out of its hands. The higher inflationary incidence observed during 2021 was explained by local sources, which, in turn, exacerbated external sources. Controlling this through TPM is textbook. But for some time now we have begun to see a migration from local to external sources, which, although still incipient, shed some light on the real scope of monetary policy to control contemporary inflation. If, at some point, the variation in prices is explained by food, fuel and other volatile elements, the degree of interference of the Issuing Institute becomes limited. It is here when communication management will be vital, so that the public understands that this extra inflation is transitory, not necessarily manageable by the Central Bank, but that, once the shock has dissipated, prices will return to their usual 3% year-on-year increase.

This is why the report is so eagerly awaited. Because if what we think is true, the market will have to cut its projections for the TPM and this would inevitably lead to a fall in short rates. If, on the other hand, the Central Bank gives a "hike until it hurts" message, the structures could flatten even more, not ruling out a complete inversion of the curve and all that this means for expectations. We will see what this new Board has in store for us, with the first IPoM with Rosanna Costa at the helm.  

Nathan Pincheira 

Chief Economist of Fynsa