Midway through the week, the Central Bank released its Monetary Policy Report, better known as the IPoM. You’ve probably heard about this report many times, but you may not be entirely sure what it means. In this brief article, we’ll try to explain what it is and, above all, why it’s so important.

The first thing we need to understand is the role that the central bank plays in the economy. Under its constitutional mandate, its objective is to ensure price stability and financial stability. To achieve the former, it has established what is known as an “inflation-targeting framework,” which, in our case, is defined as keeping inflation under control so that, within a period of 12 to 24 months, it converges to 3% year-over-year. This is extremely important because, as we have seen, the task of monetary policy is not to keep inflation at 3% TODAY, but to use all available tools to ensure 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. This is due to two reasons: (i) in the short term, inflation can fluctuate for various 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 significant volatility in interest rates, with little efficiency and perhaps doing more harm than good. The other reason is that (ii) monetary policy operates with a lag; that is, the effects of a policy adjustment this month will take time to fully take hold in the economy. How long? Quite a while. According to some estimates, the full effects should be observed between 6 and 8 semesters after the adjustments are implemented.

In this vein, in order to achieve its objective, it is important not only to thoroughly analyze current macro- and microeconomic conditions but also to develop a scenario regarding how these variables are likely to 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 domestically and internationally), it projects the most likely trends the economy will experience over the coming quarters. The Monetary Policy Report is published as an exercise in transparency; it makes the results of these analyses and projections available to all interested parties, allowing all economic agents (businesses, individuals, and the government) to anticipate potential changes in monetary conditions so 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-tier analysis and cutting-edge applied economic studies at the forefront of my beloved social science. Furthermore, it serves as a form of “accountability” to the Senate of the Republic, as the President of the Central Bank’s Board is required to present it to the upper chamber’s Finance Committee. The entire process—from drafting to publication and presentation—meets the highest standards of transparency and technical quality, and is regarded as one of the best in the world. Recently, it has been supplemented with summaries and infographics to reach a less technically inclined audience and thus expand its reach to all households interested in it. I hope that, through this brief explanation, I have sparked your interest in exploring this report further.

Nathan Pincheira

Chief Economist at FYNSA