Interest rates of Monetary Policy Chile v/s USA
(January 2007 - July 2008)
(January 2007 - July 2008)
Blue serie : Central Bank of Chile interest rates - Yellow serie : FED Interest rates at USIt is easy to depict a relation between the interest rate and Investments and we usually say when the interest rates increase Investment diminishes because people have strong incentives to save their money at the banks.
If we ask about the real effects of the interest rates on the economy we could find real examples as it is the case of this large supermarket chain at Chile ( Santa Isabel ) implementing an aggressive investment program in 2008 thought as 10 new supermarkets in different areas of the country. The total investment totalize M$ 60.000 dollars and before a month they are planning to open at least 5 new locations giving employment to 544 people during all the life of this new investments.
We assume the life of this kind of projects to be said at least 20 years so, in this sense we can think in this positions as new jobs for 544 people during the next 20 years. This fact is very inportant, not only for the investments but the families of this people now facing new posibilities in their lifes and because it is exactly what the goverment must evaluate for this particular situation.
But we have seen recently the Central Bank of Chile raising the interest rates ( July 10, 2008 ) from 6,25 % to 7,25% in a year. The stock markets has reacted inmediatly decreasing its price indexes in more than - 1 % in both indexes , said the IGPA and IPSA.
This dramatic fall in the stock markets prices are reflecting the real fact of that market internalizing new increases before the end of the year to reach levels near to 7,75% in operations between the Central Bank of Chile and the entire financial system.
Note this situation in the United States of America has been exactly the converse of what we saw during this last year in Chile. The FED has been pledging for new reductions in the interest rates. In this sense we would have to ask our-selves why the Chilean Central Bank is increasing the interest rates thought we would expect the Central Bank controlling the inflation rates with decreasing rates in the monetary supply instead of using the interbanks operation interest rates as a mechanism of control.
If there is an inflationary target to achieve (a nominal variable) again we would expect the Central Bank cutting the Monetary Supply (nominal variables) and the Goverment reducing their expenses to control the first one. In this way both the Independant Central Bank and the Government might reach their goals with no use of the interest rates.
If there is an inflationary target to achieve (a nominal variable) again we would expect the Central Bank cutting the Monetary Supply (nominal variables) and the Goverment reducing their expenses to control the first one. In this way both the Independant Central Bank and the Government might reach their goals with no use of the interest rates.
The effect of a reduction of the interest rate is to reduce the private consumption and Investments, forcing to the entire country to sacrifice present consumption and present investments in an artificial way. This is , because in a small open economy we would expect the inflation rate adjusting to capital inflows troughout the country and the world.
Finally we would expect again the goverment pursuing real policies to increase the Gross Domestic Product , reducing the interest rates to levels near of 2,25 % as it has been in the United States of America where the FED has been cutting the rates to increase the economic activity.
