The March IPoM did not disappoint. After a series of high inflationary data high inflationary data, significant increases in TPM and relevant changes in the external macro scenario, the Council's projections were eagerly awaited by the market, which had already been adjusting its expectations for several weeks. We wrote about this last week, when we pointed out the most likely strategies that could be followed by the issuing entity and our own option in this regard.. Humbly, just what happened.

However, it all started one day earlier, at the Monetary Policy Meetingmeeting, when the Central Bank Central Bank increased the TPM 150 basis points, to 7.00%, in line with our expectations, but below what the market expected (200 bps). In addition, the statement indicated that future rate hikes would be lower than in recent quarters, which provided relevant information about what was to come the next day.

In this regard, the IPoM confirmed all this, with a view that could perhaps be read as less inflationary. less inflationary than the market and, consequently, would require less would require less monetary policy adjustments. However, with respect to the previous scenario, the report included more inflation and more TPMHowever, compared to the previous scenario, the report included more inflation and more TPM hikes, just not as many as the market had been incorporating in prices, which in our view had gotten out of hand. Year-on-year inflation exceeding 12% at mid-year, closing at almost 9% in 2022 and including key rate hikes above 10%, seemed excessive to us. Thus, the baseline scenario published by the Central Bank projects inflation to be close to 10% by mid-year, but which would decelerate to 5.6% in December, which would require slight additional adjustments in the TPM, with a maximum that could reach 8.5%.

The published macro outlook still incorporates high inflationary records for the coming months, especially in the current context of rising food and commodity pricesespecially in the current context of rising food and commodity prices, but with a significant slowdown in the second half of the year. a significant slowdown towards the second half of the year.. Part of this would be due to the strong economic deceleration that the country would experience in the second part of the year, influenced by the lower contribution of domestic demand, to which would be added a lower external impulse. The figures published this morning only supported this, with an Imacec for February that grew "only" 6.8% compared to the same month of last year (8%-9% was expected), but also showing a strong contraction compared to January, with all sectors falling in the margin, including services. Inflation, which no longer fed off the strong demand momentum of last year, no longer required aggressive monetary policy adjustments.

In any case, we know that recent rate hikes have not only been explained by structural causes, but also aimed at aligning inflationary expectations, which have been de-anchored in different terms.but have also been aimed at aligning inflationary expectations, which have been de-anchored in different terms. Qualitative information shared by the Issuing Institute suggests that at least 50 bp of the last increase was only motivated by this reason, which according to our estimates could be more. This situation could go against what was expressed in the statement of RPMs statement, as a couple more hikes may not be enough to anchor expectations. However, and probably in one of the most important statements of this report, it was mentioned that the rate cannot rise indiscriminately until expectations return to the desired levels, This shows that the Central Bank cannot be a hostage of the market and forget the real effects that a highly contractionary rate may have on activity. For this reason, the aim is to reach the 3% target within two years, in order to avoid abrupt adjustments that are undesirable for society, especially in a complicated social and health context such as the current one.

Let's see who was rightbut it seems that the market has given up a bit and has been aligning itself with the Bank's macro scenario. Probably the biggest doubts remain with the inflation projection for the end of the year (we ourselves, who are already under the consensus, remain on the IPoM), but that still has time to play out, especially considering the external factors that are influencing it.

Nathan Pincheira Chief Economist of Fynsa