Halfway through the week, the Central Bank published the Monetary Policy Report, better known as IPoM. Surely you have heard this report many times, but you are not very clear about what it means. In these humble lines, we will try to explain what it is and, above all, why it is so important.

The first thing we must understand is the role of the Issuer in the economy. According to its constitutional mandate, its objective is to ensure price stability and financial stability. For the former, it has defined what is called "inflation targeting scheme" which, in our case, is explicit in keeping inflation under control, such that in a term between 12 and 24 months it converges to 3% interannual. This is extremely important, since, if you notice, the task of monetary policy is not to keep inflation at 3% TODAY, but to use all available tools so that TOMORROW it will reach that 3%.

Why doesn't the Central Bank care about inflation today, but it does care about inflation tomorrow? That is a good question, the answer to which is quite simple for those of us who know the mechanisms of monetary policy, but not necessarily for the ordinary citizen. This happens for two reasons: (i) in the short term, inflation can move for various reasons, many of which have little to do with monetary policy: drought, dock workers' strike, changes in the tax structure, natural disasters, etc. Trying to control these swings would imply a lot of volatility in the interest rate, with little efficiency and perhaps doing more harm than good. The other reason is that (ii) monetary policy acts with a lag, i.e., the effects of a movement during this month will take time to fully consolidate in the economy. How long? Not long. According to some estimates, the full effects should be observed between 6 and 8 semesters after the movements are applied.

In order to fulfill its objective, it is important to have a thorough analysis of the current macro and microeconomic conditions, but also to have a scenario regarding the behavior of these variables in the future. This does not mean that the Central Bank has a crystal ball (neither do we), but by studying the past (local and external) it projects the most probable dynamics that the economy will experience during the next quarters. In an exercise of transparency, the Monetary Policy Report is born, in which the results of the analysis and projections are made available to all interested parties, allowing all economic agents (companies, individuals, government) to foresee 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 first-rate applied economic studies, at the frontier of knowledge of my beloved social science. In addition, it functions as a kind of "accountability" before the Senate of the Republic, since the Chairman of the Board of the Central Bank must present it to the Finance Committee of the upper house. The entire process, from the preparation, publication and presentation, complies with the highest standards of transparency and technical quality, being catalogued as one of the best in the world. Lately it has been complemented with summaries and infographics, in order to reach the less technical public and thus expand its reach to all households that have an interest in it. Just as I hope, through this brief explanation, to have generated interest in wanting to investigate this, the report.

Nathan Pincheira

Chief Economist, FYNSA