Fynsa
When questioned by some of his critics for defending ideas that seemed contradictory to others he had expressed in the past, economist John Maynard Keynes said, "When the facts change, I change my mind. And you?"For those of us who work with data and try to interpret reality with it, this phrase should be tattooed on our bodies and never forgotten. It sounds easy, but it is always tempting to believe that one is not wrong, to stubbornly ignore the evidence or to believe that, for once, things will be different. It is not always a valued skill, in an age when not changing one's convictions seems to be an almost saintly characteristic, even though those convictions may be outdated, inaccurate, or—plain and simple—false. It was not for nothing that Russell said he would not die for his convictions, as he could be wrong.
I mention all this because today the evidence is changing faster than ever. We went from a global recession caused by the coronavirus to an overheated economy, with inflation problems everywhere. We went from globalization that was growing by leaps and bounds to nationalist policies and a world increasingly closer to returning to the logic of blocs. We went 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 of our Central Bank's Council at the Monetary Policy Meeting held on May 4 and 5. That is why the publication of the minutes of that meeting came in handy. Although it resolved some of our doubts, it raised others. Let us remember that, at this meeting, the rate was raised by 125 basis points, surprising the market, and the tone of the message included in the immediately preceding meeting was also changed.
In my opinion, I would say that, of the three reasons given, two were very predictable and the third was not so much. Thus, the better activity data for the first quarter (which, let us remember, were revised downward with the publication of the National Accounts, so I do not know how much that holds up) showed somewhat more resilient activity than expected in the last IPoM, particularly consumption. Qualitative data could indicate a milder slowdown in this component, which could be offset by additional weakness in investment. Similarly, developments in fundamentals, the labor market, and credit continued to point to lower momentum for the second half of the year, consistent with low growth rates in 2022 and 2023.
The second reason 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: the impact of the war on food supplies, energy prices, supply chain complications, etc.
However, the third was quite interesting, mainly because of the sudden change in interpretation 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 of March's CPI (1.9% m/m vs. 1.0% m/m from the Central Bank) did not help much in this regard. If we add to that the surprise in April, the projection for December was completely off the mark. In any case, like us, the reading is that much of the new inflation is explained precisely by external components, unlike the previous one. And here the change in interpretation is related to the fact that, despite the above, this does not mean that the Council should do nothing about it. Reasons such as persistence and the effect on expectations are put forward, but in our view, this is not something new or something that changed only with the latest data. Inflation in the March IPoM was already high, expectations were that it would remain high or even higher, external shocks were already present, and yet it was announced that the rate hike process was about to end.
I don't want this to be taken as criticism. In fact, I think it's commendable that, when faced with changes in the evidence, the Central Bank is serious enough to change its decisions and take responsibility for them. 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 seen 775 basis points of increases. The only thing I would like to understand better is why the change in strategy in the face of the change in the composition of inflation, insisting, moreover, that the rate was already at 7.0%, the most contractionary level in recent decades (yes, even more than before the subprime crisis, although the nominal level on that occasion was higher) and there were still a couple of increases to come. Now, the rate is at 8.25%, much more contractionary, and more hikes are expected after the tone of the statement, which removed the paragraph regarding the end of the cycle of increases. Post-Fed effect? An attempt to hit the exchange rate through carry trade? A very hasty decision in the last IPoM?
Let's see, now that the presentation of the next IPoM is just around the corner, what the scenario looks like and, above all, the much-debated monetary policy corridor. For now, we continue to expect increases in the MPR, which is expected to reach a maximum level of 9.5%.
