The big surprise of the week was undoubtedly the Central Bank's rate hike. Well, perhaps also the national team's two home wins, but let's focus on the former. I doubt there is any market player who did not expect a rise in the benchmark rate, but probably none (if you did, my apologies) of the magnitude that occurred: 125 basis points. The decision, as the statement says, was taken unanimously by its members and is part of a normalization of monetary policy (after two adjustments totaling 100 bp) as a result of inflationary pressures stemming, in part, from an overheated economy. Before you ask me for the umpteenth time, no, it is not the only reason, but it is perhaps the most important one and the one on which the Central Bank can take action.

The curious thing is that, unlike other occasions, the causes are not associated with changes in the external scenario (which, interestingly, is almost exactly as described in the last IPoM) or with local cyclical growth. No, the causes are associated with measures that began as temporary and exceptional support for families as a result of the complex situation they faced in the midst of the pandemic, which have become almost permanent and have led to other measures that have little to do with improving people's well-being and more to do with undermining the current institutional framework. For each of these discussions, the president of the Central Bank, Mario Marcel, has attended (virtually or in person) Congress to present a technical view on the debate and has been systematically ignored and even personally attacked by members of parliament. Stoically, the Bank's authorities have remained on the sidelines of these interpellations, despite the fact that those who make them believe that a high copper price depreciates the peso (?). 

However, the other big surprise came in the message of the statement. I must be honest and mention that I felt some satisfaction when I read the lines in which the Central Bank stopped being so politically correct and named the causes of financial instability and inflation: "uncertainty caused by political and legislative issues, particularly with regard to new withdrawals from pension funds." Continuing to avoid calling things by their name could be negligent, especially when some people are quick to blame the night, the beach, and the moon for the increase in prices, rates, and the exchange rate.

What lies ahead in the immediate future? More increases, without a doubt. These are necessary to anchor market expectations, demonstrate commitment to its constitutional mandate, and prevent an overflow in the tax that most affects those with lower incomes. Thus, it is most likely that in December, prior to the publication of a new IPoM, the MPR will show a further increase of around 100 bp, closing 2021 at 3.75%, which, according to our estimates, would be at the high end of neutrality. In a simple exercise, we calculate that the nominal MPR that would replicate the effective rate present in other periods of overheating (e.g., 2012-2014) would be around 4.5%, which, according to our scenario, would be reached in March 2022. 

Nathan Pincheira

Chief Economist at Fynsa