Fynsa
After about five years, inflation returned to below 3%. Although we know that the Central Bank's objective, related to price stability, is geared toward this variation over a two-year period, it is still important that the current price variation materializes at that value. In this cycle, it was so difficult to return to the target that I have no doubt that some advisor took advantage of that day to call the friend who was teasing him about it to say, "look who you were making fun of."
This allows us to make another check within what can be called long-term macro variables. I would say that, with the exception of the exchange rate (which has been less affected, but responds more to an external context than a local one), activity, prices, and the reference rate reflect, more or less, what we are as a country. No more, no less. For this reason, personally, I found it difficult to understand the decision not to cut 25 bp in January, to bring the MPR to 4.25%, and to decide to wait a little longer, probably until March. But anyway, it's done now, and market participants today hardly disagree that the cut will be made at the next meeting, and we are among them. What comes next may seem trivial, but I think it is a question of enormous relevance: what now?
In my professional practice, particularly in this specific niche that is the financial industry, I have realized that the market has a short memory. Mind you, I am not referring to local agents; this is a global phenomenon that responds to a concern that has also been analyzed in other fields of social sciences: the possibility that things really are different now. But just like getting back together with an ex (because yes, I know that's what you were thinking), they usually aren't. Prior to the social unrest/pandemic, the debate centered on whether we would ever see inflation or whether interest rates were destined to remain at zero or negative. Many suggested lowering the Central Bank's inflation target to 2% or 1%, since otherwise there was a risk of consistently falling short of expectations. The debate around the world was similar, prompting the Fed to change its point target to an average target, a compromise between what had been in place until then and those who proposed an index target (basically between allowing past deviations to affect future targets or only considering the future and the past, which had been trampled on).
Just a few years later, but with a lot going on with ultra-expansionary fiscal policies to deal with the global pandemic, the debate shifted completely. Now, faced with persistently high inflation and historically restrictive monetary policies, the proposal was to raise inflation targets or be more lax with them. In the US, with its dual mandate, the proposal was to focus more on employment and look a little less at inflation. In Chile, not to be outdone, interviews and opinion columns called on the Central Bank to raise its target to 4% or 5%, or extend the 2-year term to 3 years, etc. Inflation was here to stay and never return to that elusive 3%.
But we made it. It took us a while, but we made it.
Now, of course, everyone will say that they knew, that they always trusted, that those columns were never written, and that those tweets were caused by hacking. Joking aside, the lesson is that the current situation is not necessarily permanent and that both monetary and fiscal policy require constant work to meet their objectives and, at the end of the day, fulfill their purpose: to reduce the volatility of the economic cycle in order to increase the well-being of citizens. So we will be in this for the long haul, but believe me, it won't be forever.
