The World Economic Forum (WEF) published the Global Risks Report 2023, highlighting that over the next two years society’s greatest concern will be the cost of living, overcoming natural disasters and extreme weather, geo-economic confrontations, failure to mitigate global warming and the erosion of social cohesion. A clear sign, today, that the loss of purchasing power and the increase in the cost of living is a priority issue in the world. It is striking that inflation did not figure in the first 10 concerns of the same report in 2022.
In the region, Argentina, Brazil, Colombia, Peru, Venezuela and Uruguay share inflation with Chile as one of the biggest concerns. When looking at the figures by country, the first concern for Chile is, coincidentally, the rise in the cost of living, which seems to be evident, if we consider that inflation in twelve months reached 12.8%, the highest in 31 years.
In this context, the interest rate hikes made by the Central Bank of Chile seem to be a wise decision, especially when the market predicts inflation by December 2023 around 5.0%-6.0%, which although it remains 300 basis points above the BCCh’s target target, is less than half of the increase in the cost of living experienced the previous year. However, it is prudent to remember that the tightening of monetary policy also generates adverse effects, such as higher credit prices, mainly at shorter terms, and a decrease in investment/employment, so it is not advisable to temporarily sustain a monetary policy of a hawkish.
Evidence points to monetary policy being most effective in supporting economic growth when central banks are independent, autonomous. Conversely, it is less effective in markets with institutional weaknesses. This last point is relevant at the national level, especially when, according to the latest study by the Center for Social Cohesion Studies, trust towards institutions has experienced a sharp decline.
Undoubtedly, economically, this 2023 will be a challenging year, although timid and gradually more auspicious than 2022, slightly easing the cost of living on people, in their pockets. But, for that to continue to be a trend, we must trust in the work done by the Central Bank of Chile, in its autonomy. Society has already understood their important work, or, at least, their concern reflects it.
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The content expressed in this opinion column is the sole responsibility of its author, and does not necessarily reflect the editorial line or position of El Mostrador.
