Fynsa
When questioned by some of his critics for defending ideas that seemed to contradict others he had expressed in the past, economist John Maynard Keynes said, “When the facts change, I change my mind. Do you?”For those of us who work with data and try to interpret reality through it, this phrase should be tattooed on our bodies and never forgotten. It sounds easy, but it’s always tempting to believe that one isn’t wrong, to stubbornly cling to the evidence, or to believe that, just this once, things will be different. It is not always a valued skill, in an age when sticking to one’s convictions seems to be an almost saintly trait—even though those convictions may be outdated, inaccurate, or—plain and simple—false. It’s no wonder Russell said he wouldn’t die for his convictions, since he might be wrong.
I mention all this because today the evidence is changing faster than ever. We’ve gone from a global recession caused by the coronavirus to an overheated economy, with inflationary pressures everywhere. We’ve gone from globalization advancing by leaps and bounds to nationalist policies and a world increasingly on the verge of returning to the logic of blocs. We’ve gone from a TPM of 0.5% to one of 8.25% in less than a year.
In this context, it was interesting to learn about the decision-making process followed by our Central Bank’s Board at the Monetary Policy Meeting held on May 4 and 5. That is why the publication of the minutes from that meeting came at just the right time; while they resolved some of our doubts, they raised others. Let’s recall that, at this meeting, the rate was raised by 125 basis points, the market was taken by surprise, and the tone of the message from the immediately preceding meeting was also changed.
In my opinion, I’d say that, of the three reasons given, two were quite expected and the third not so much. Thus, the stronger economic activity data for the first quarter (which, let’s recall, were revised downward with the release of the National Accounts, so I’m not sure how much weight that carries) pointed to somewhat more resilient activity than expected in the latest IPoM, particularly in consumption. Qualitative data might point to a milder slowdown in this component, which could be offset by further weakness in investment. Likewise, developments in economic fundamentals, the labor market, and credit continued to point to slower growth in the second half of the year, consistent with low growth rates in 2022 and 2023.
The second factor had to do with external inflation, which continued to rise. The reasons for this are well known, so I won’t go into too much detail about them: the war’s impact on food supplies, energy prices, supply chain disruptions, etc.
However, the third one was quite interesting, mainly because of the sudden shift in the forecast from one month to the next. The Central Bank’s inflation estimate in the March IPoM had already been questioned as “optimistic”, and the surprise in the March CPI (1.9% m/m vs. the Central Bank’s 1.0% m/m) didn’t help much in this regard. If we add April’s surprise to that, the projection for December fell completely outside the expected range. In any case, just like us, the takeaway is that much of the new inflation is explained precisely by external factors, unlike the previous reading. And here, the shift in interpretation stems from the fact that, despite the above, this does not mean the Council should do nothing about it. Reasons such as persistence and the effect on expectations are cited, but in our view, this is not something new, nor did it change solely with the latest data. Inflation in the March IPoM was already high, expectations were that it would remain high or rise even further, external shocks were already present, and yet it was announced that the rate-hiking cycle was nearing its end.
I don't want this to be taken as criticism; in fact, I think it's commendable that, in light of new evidence, the Central Bank is serious enough to change its decisions and take responsibility for doing so. When the evidence changes, everyone has the right (or the duty) to change their mind. The entire market has been wrong (in Chile and around the world); inflation has exceeded all estimates, and there are still central banks that have done nothing—or very little. Ours has raised rates by 775 basis points. The only thing I’d like to understand better is why the strategy changed in response to the shift in the composition of inflation—especially given that the rate was already at 7.0%, the most restrictive level in recent decades (yes, even more so than before the subprime crisis, although the nominal level at that time was higher)—and there were still a couple of hikes left. Now, the rate stands at 8.25%, which is much more restrictive, and further hikes are expected given the tone of the statement, which removed the paragraph regarding the end of the rate-hiking cycle. Post-Fed effect? An attempt to influence the exchange rate through carry trades? Was the decision at the last IPoM meeting too hasty?
Now that the next IPoM release is drawing nearer, let's take a look at the current situation and, above all, the much-debated monetary policy corridor. For now, we continue to expect increases in the TPM, bringing it to a maximum level of 9.5%.
