Fynsa
Questioned by some of his critics for defending ideas that sounded contradictory to others expressed in the past, economist John Maynard Keynes said, "When the facts change, I change my mind, economist John Maynard Keynes said, "when the facts change, I change my mind, don't 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 be fooled by the evidence or to believe that, for once, things are going to be different..... It is not always a valued skill, in an age when not changing one's convictions seems to be an almost saintly trait, even though those convictions may be stale, inaccurate or - plain and simple - false. Not for nothing did Russell say that he would not die for his convictions, since 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 a globalization that was growing by leaps and bounds, to nationalistic politics and a world ever closer to returning to the logic of the blocs. We went from a TPM at 0.5% to 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 Board at the Monetary Policy Meeting held on May 4 and 5.. This is why the publication of the minutes of that meeting came in handy, which, although it solved some of our doubts, left others open. Let us recall that, at this meeting, the rate was raised by 125 basis points, the market was surprised and the tone of the message included in the previous meeting was changed..
In my opinion, I would say that, of the three reasons given, two were very much to be expected and the third was not so expected.. Thus, the better activity data for the first quarter (which were corrected downwards with the publication of the National Accounts, so I don't know how much that holds up) showed a somewhat more resilient activity than expected in the last IPoM, particularly consumption. Qualitative data could point to a milder deceleration of this component, which could be compensated by an additional weakness in investment.. Likewise, the development of fundamentals, the labor market and credit continued to anticipate a lower dynamism for the second part of the year, consistent with low growth rates in 2022 and 2023.
The second rationale had to do with external inflation, which was continuing to rise.. Here the reasons are well known, so I will not delve into them: impact of the war on food supply, energy prices, supply chain complications, etc.
However, the third one was very interesting, mainly because of the sudden change in the reading from one month to another. The Central Bank's estimate for inflation in the March CPI had already been questioned as "optimistic", and the surprise of the March CPI (1.9% m/m vs. 1.0% m/m of the Central Bank) was very interesting.and the March CPI surprise (1.9% m/m vs. 1.0% m/m from the Central Bank) did not help much in this sense. If we add to that the April surprise, the December projection was out of range. In any case, as we do, the reading is that a large part of the new inflation is explained by external components, unlike the previous one.. And here the change of reading is related to the fact that, in spite of the above, this does not mean that the Council should not do anything 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 March's IPoM was already high, expectations were that it would remain high or even higher, external shocks were already present and, even so, it was communicated that the process of rate hikes was soon to end.
I do not want this to be taken as a criticism; in fact, I think it is commendable that, in the face of changes in the evidence, the Central Bank is serious enough to change its decisions and take responsibility for them.In fact, I think it is commendable that, in the face of changes in evidence, the Center is serious enough to change its decisions and take responsibility for it. In the face of changing evidence, everyone has the right (or the duty) to change his or her mind.. The whole market has been wrong (in Chile and the world), inflation has exceeded all estimates and there are still Central Banks that have done nothing, or very little. Ours has been rising for 775 bp. The only thing I would like to understand more is why the change of strategy in the face of the change in inflationary composition, insisting, moreover, that the rate was already at 7.0%, the most contractionary level of the last 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 hikes left. Now, the rate is at 8.25%, much more contractionary, and more hikes are expected after the tone of the statement, which eliminated the paragraph regarding the end of the hiking cycle. A post-FED effect, an attempt to hit the exchange rate through the carry trade, a very hasty decision in the past IPoM?
Let's see, now that there is less time left for the presentation of the next IPoM, how the scenario looks like and, above all, the questioned monetary policy corridor. For the time being, we continue to expect increases in the TPM to reach a maximum level of 9.5%.
