March's IPoM did not disappoint. After a series of high inflation figures and significant increases in TPM and relevant changes in the external macroeconomic 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 the issuing entity could follow and our own opinion on the matter. Humbly, this is exactly what happened.

However, it all started the day before, at the Monetary Policy Meeting, when the Central Bank raised the MPR by 150 basis points to 7.00%, in line with our expectations but below market expectations (200 bp). In addition, the statement indicated that future rate increases would be smaller than those made in recent quarters, which provided relevant information about what was to come the next day.

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

The macroeconomic outlook still incorporates high inflation rates for the coming months, especially in the current context of rising food and commodity prices, but with a significant slowdown in the second half of the year. Part of this would be due to the sharp economic slowdown that the country would experience in the second half of the year, influenced by lower domestic demand, to which would be added a weaker external boost. The figures published this morning only served to reinforce this, with February's Imacec growing by "only" 6.8% compared to the same month last year (8-9% was expected), but also showing a sharp contraction compared to January, with all sectors falling in the margin, including services. Inflation, which was no longer fueled by the strong demand seen last year, no longer required aggressive monetary policy adjustments.

In any case, we know that the latest rate increases have not only been explained by structural causes, but have also sought to align inflation expectations, which have become unanchored in different time frames. Qualitative information shared by the Issuing Institute suggests that at least 50 bp of the latest increase were motivated solely by this reason, which according to our estimates could be more. This situation could run counter to what was stated in the RPM, as a couple more increases may not be enough to anchor expectations. However, and probably in one of the most important statements in this report, it was mentioned that the rate cannot rise indiscriminately until expectations return to the desired levels, showing that the Central Bank cannot be held hostage by the market and forget the real effects that a highly contractionary rate can have on activity. That is why the goal is to reach 3% within two years, to avoid sudden adjustments that are undesirable for society, especially in a complicated social and health context such as the current one.

Let's see who was right, but it seems that the market has softened a little 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 below the consensus, remain above the IPoM), but there is still time for that to settle, especially considering the external factors that are influencing it.

Nathan Pincheira | Chief Economist at Fynsa