Fynsa
During the week, the Central Bank released the minutes of the June Monetary Policy Meeting, at which, as we recall, it raised the TPM by 75 basis points, bringing it to 9.0%. The following day, the IPoMwas published, so much of the strategy and scenarios considered at that meeting are already known, but it was still interesting to learn about the more tactical aspects of the decision.
Along those lines, beyond the conducted that was conducted, emphasis was placed on something we discussed in last week’s column: the role of the Central Bank’s credibility and reputation—not only to control current inflation, but also to avoid altering structural conditions, primarily microeconomic ones, that allow future inflation to remain under control future inflation. Consistent with this, it openly states that the current rate hikes are a response to supply shocks—to which it typically does not react, but which are expected to be more persistent than usual, affecting inflationary momentum. Our impression is that these moves are intended primarily to influence expectations.
In addition, to avoid the surprises seen at the two previous meetings (one below and one above market expectations), the Council has chosen not to surprise market participants, which is quite revealing regarding the future rate-hike cycle. Given that the other option was a 100-basis-point hike—which was ruled out due to the need to shift to a neutral stance that could be counterproductive—we believe a 50-basis-point hike is likely, followed by a pause. Of course, there is always the option of adjusting within the margin, but in terms of magnitude, the MPR would come in at around 9.5% (this being our base case scenario) and would only be adjusted in the face of compelling evidence that the persistence of supply shocks is dissipating. In any case, we think it’s important to note that, while that could mean lowering it a little later than activity data would suggest, it could also mean cutting it very aggressively when the time comes.
One question we’ve been asked lately is whether the depreciation of our currency might require further adjustments to TPM adjustments beyond those mentioned so far. Although nothing can be ruled out, I think this is unlikely for two reasons: First, a significant portion (not all of it, of course) of the peso’s depreciation has been caused by the strength of the dollar globally. Chile’s current floating exchange rate regime allows for market intervention when there are obvious discrepancies between the exchange rate and what the fundamentals suggest, which, according to the vice president of the Council, is not currently the case—or at least not to an extent that, in his assessment, would justify an intervention. And, secondly, exactly this: in the event of a significant imbalance, or a problem with flows or liquidity in the dollar market, the Central Bank would prefer to intervene rather than try to defend the currency through monetary policy. If you ask me, the peso seems oversold, and current levels shouldn’t be permanent. But I’m not ruling anything out.
For now, then, we'll just have to wait for the end of a cycle. Of ups, of course.
