Fynsa
You’ve probably noticed that when we talk about monetary policy, we try to gauge its effectiveness by measuring the gap between current inflation (or projected inflation, which is the correct approach) and its target. It seems perfectly normal to us, and we quickly accept it and move on to the next topic.
However, this was not always the case, nor is it the case in every country. The inflation-targeting frameworks implemented by central banks are relatively recent, but they have been extremely effective in keeping inflation under control and, at the same time, powerful tools for enhancing the credibility and reputation of monetary institutions. Chile was a pioneer in the use of inflation targeting and has also been at the global forefront in refining it.
The Federal Reserve, on the other hand, was one of the last major central banks to adopt these objectives, under the leadership of Ben Bernanke, who, while still in academia—before becoming Fed chair—developed much of the theory behind them.
Having an inflation target over a specific time horizon anchors expectations regarding monetary policy. It allows economic agents to know “what to expect,” reduces the volatility of other prices in the economy (especially those of financial assets), and, if the target is credible, facilitates decision-making over longer time horizons, thereby reducing their uncertainty.
In any case, this requires that the tool available to the Central Bank (generally the interest rate, but in other cases it may be monetary aggregates) be focused on a single objective rather than several. In short: one tool, one objective.
The purpose of this entire introduction is to enable the reader to follow my line of thought and analysis when I read the most recent minutes of the latest Monetary Policy Meeting—the one that took place prior to the publication of the IPoM.
It is not new, then, that the MPR is expected to remain at its current level of -11.75% for an extended period of time, until there is convincing evidence that macroeconomic imbalances are on track to dissipate. But that might seem very general or abstract to some. I am constantly asked whether the Central Bank is unconcerned about severely affecting economic activity in certain sectors with a historically restrictive interest rate and, if so, whether it might eventually lower it to mitigate those harmful effects on economic activity.
My answer is that the Central Bank’s constitutional mandate is inflation. Therefore, regardless of the degree of activism, its measures should be aimed at achieving that objective and no other. Of course, it has a team and an entire division analyzing economic activity, but that is because its dynamics directly or indirectly affect price trends.
This becomes much clearer to me when I analyze the minutes and see that, without a doubt, all the board members’ efforts are focused on controlling inflation. In fact, this is explicitly stated, since, when considering the harmful effects on economic activity of a more contractionary monetary policy, they conclude that there is no alternative but to bear those costs in order to fulfill their mandate and, in fact, avoid much higher costs in the future. Therefore, even if the figures aren’t the best in the coming months, make no mistake: the rate will remain high until at least September.
