Midway through the week, the Central Bank published its Monetary Policy Report, better known as IPoM. You have probably heard about this report many times, but may not be entirely clear on what it means. In this humble article, we will try to explain what it is and, above all, why it is so important.

The first thing we need to understand is the role that the issuing authority plays in the economy. Its constitutional mandate is to ensure price stability and financial stability. To achieve the former, it has defined what is known as an "inflation targeting framework" which, in our case, means keeping inflation under control so that it converges to 3% year-on-year within a period of 12 to 24 months. This is extremely important because, if you think about it, the task of monetary policy is not to keep inflation at 3% TODAY, but to use all available tools so that TOMORROW it reaches that 3%.

Why isn't the Central Bank concerned about inflation today, but is concerned about tomorrow's inflation? That's a good question, and the answer is quite simple for those of us who understand the mechanisms of monetary policy, but not necessarily for the average citizen. There are two reasons for this: (i) in the short term, inflation can fluctuate for a variety of reasons, many of which have little to do with monetary policy: drought, port workers' strikes, changes in the tax structure, natural disasters, etc. Attempting to control these fluctuations would lead to high interest rate volatility, with little efficiency and perhaps doing more harm than good. The other reason is that (ii) monetary policy acts with a lag, meaning that the effects of a change this month will take time to fully consolidate in the economy. How long? Quite a while. According to some estimates, the full effects should be seen between six and eight semesters after the changes are implemented.

In this vein, in order to achieve its objective, it is important to thoroughly analyze current macro- and microeconomic conditions, but also to have a scenario regarding how these variables would behave in the future. This does not mean that the Central Bank has a crystal ball (neither do we), but rather that, by studying the past (both local and external), it projects the most likely dynamics that the economy will experience over the coming quarters. In an exercise of transparency, the Monetary Policy Report is published, making the results of the analyses and projections available to all interested parties, allowing all economic agents (companies, individuals, the state) to anticipate possible changes in monetary conditions so that they can act accordingly and optimize their consumption, savings, and investment decisions. 

This report is published four times a year (March, June, September, and December) and contains top-level analysis and cutting-edge applied economic studies at the forefront of my beloved social science. It also serves as a kind of "accountability" report to the Senate, as the President of the Central Bank Council must present it to the upper house's Finance Committee. The entire process, from preparation to publication and presentation, meets the highest standards of transparency and technical quality, and is ranked as one of the best in the world. Recently, it has been supplemented with summaries and infographics in order to reach a less technical audience and thus expand its reach to all households that may be interested in it. I hope that this brief explanation has sparked your interest in learning more about this report.

Nathan Pincheira

Chief Economist at FYNSA