Next week, specifically on Wednesday, the Central Bank will publish its March Monetary Policy Report, which is likely to be one of the most eagerly awaited reports in recent times. The economic landscape has changed significantly over the last three months, not only due to the data we have seen on the local economy (mainly inflation) but also due to external developments, particularly Russia's invasion of Ukraine.

In this regard, monetary policy has had to be adjusted along the way, with significant increases in the MPR and a message pointing to further increases in the immediate future. While this is nothing new in terms of direction, it has been 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 expected the MPR to reach 6%, while today it projects that it will exceed 10%, which would lead us to have a more contractionary monetary policy than even that during the Asian crisis (the rate was higher, but in comparable terms it was less contractionary). This is in order to address the high inflation that our economy is currently experiencing, which is climbing to almost 8%, but is likely to exceed 9% (both year-on-year) by the middle of the year.

However, we must be careful not to start demanding something from the Central Bank that may be beyond its control. The higher inflation observed during 2021 was explained by local sources, which, in turn, exacerbated external sources. Controlling this through the MPR is textbook stuff. But for some time now, we have begun to see a migration from local sources to external sources, which, although still in their infancy, shed some light on the real scope of monetary policy to control contemporary inflation. If, at some point, price variations are explained by food, fuel, and other volatile elements, the degree of interference by the issuing institute is limited. This is when communication management will be vital, so that the public understands that this extra inflation is temporary, not necessarily manageable by the Central Bank, but that once the shock has dissipated, prices will return to their usual 3% increase in year-on-year terms.

That 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 MPR, and this would inevitably cause a fall in short-term rates. If, on the other hand, the Central Bank sends a message along the lines of "raise until it hurts," the structures could flatten even further, not ruling out a complete inversion of the curve and all that that means for expectations. We will see what this new Council has in store for us, with the first IPoM headed by Rosanna Costa.  

Nathan Pincheira 

Chief Economist at Fynsa