Fynsa
Surely, you have noticed how, when we talk about monetary policy, we try to measure its effectiveness by measuring the gap between current (or projected, which is correct) inflation and its target. It seems to us the most normal thing in the world and we quickly accept it and move on.
However, this was not always the case, nor is it the case in all countries. Inflation targeting schemes applied by Central Banks are relatively recent, but they have been extremely efficient in keeping inflation under control and, at the same time, powerful tools to enhance the credibility and reputation of monetary institutions. and, at the same time, powerful tools for enhancing the credibility and reputation of monetary institutions. Chile was a forerunner in the use of inflation targeting and has also been at the forefront worldwide in perfecting it.
The Federal Reserve, on the other hand, was one of the last major central banks to embrace these objectives, led by Ben Bernanke, who, from academia, before becoming chairman of the Fed, developed much of the theory behind them.
Having an inflation target, in a given term, anchors expectations about monetary policy. It allows agents to know "what to expect", reduces the volatility of other prices in the economy (especially those of financial assets) and, in the case that the target is credible, facilitates people's decision making over longer terms, reducing their uncertainty.reducing their uncertainty.
In any case, this requires that the tool at the disposal of the Central Bank (in general, the interest rate, but in other cases it can be monetary aggregates) be focused on one objective and not on several. In short: one tool, one objective.
All this introduction is so that the reader can then follow my train of thought and analysis when it was my turn to read the most recent minutes of the last Monetary Policy Meeting, the one that took place prior to the publication of the MPI.
It is not new, then, that the TPM is expected to remain at its current level -11.75%- for an extended period of time, until there is convincing evidence that macroeconomic imbalances are on the way to dissipating. But that might be too general or abstract, in someone's eyes. I am constantly asked whether the Central Bank does not mind seriously affecting activity in some sectors with a historically contractionary rate and whether, if it does, it can eventually reduce it to lessen those harmful effects on activity.
My answer is that the Central Bank's constitutional mandate is inflation. Therefore, with greater or lesser activism, its measures should be aimed at achieving that objective and no other. Of course it has an eye and a full division analyzing what is happening with activity, but because its dynamics directly or indirectly affect the evolution of prices.
It is much clearer to me when analyzing the minutes and seeing that, without a doubt, all the efforts of the board members are oriented towards inflation control. In fact, is explicit, since, when considering the harmful effects on activity of a more contractionary monetary policy, They conclude that there is no alternative but to assume these costs in order to fulfill their mandate and, in fact, avoid much higher future costs. Therefore, even if in the coming months the figures are not the best, don't get lost: the rate will remain high until at least September.
