The signs are clear that it is urgent to start adjusting the reference rate downwards, but the Bank of Mexico (Banxico) remains obstinate in its excessively restrictive monetary stance (high interest rates), with which contributes –more than anything– to keeping the peso inflated. And that, without a doubt, will have long-term negative implications for the country’s economy.
Meanwhile, let the weight drunkenness continue, which along the way is leaving many with holes in their pockets!
But let’s see: despite the restrictive rhetoric of the Central Institute in its most recent monetary policy decision, to keep the interest rate unchanged at 11.25 percent, economic analysts maintain their forecasts of an imminent decrease in that reference index. Hopefully, although we doubt it in this space.
Just as an example, the Citibanamex Survey of Expectations among experts concludes that, eventually, the central bank will begin to cut rates this year. of what magnitude? They estimate that the reduction will be 25 basis pointstaking its benchmark to 11 percent at the end of December, that is, it would be too slight a drop.
Seriously, the stubbornness with which Banxico maintains its extremely restrictive position, despite changing circumstances, is already worrying. And although some analysts expect a first cut in November, the institution has insisted on its argument that inflation and the risks of rising even more justify its current position.
The minutes confirm the foolishness of Banxico
Such immobility is clearly reflected in the minutes of the most recent decision of the Central Institute, since in them it recognizes that there are positive signs regarding inflationdriven by several factors, such as the mitigation of pandemic impacts and geopolitical conflicts, but it remains attached to its view that the outlook is complex and that underlying inflation risks persist.
While this cautious approach is understandable, it is leading to an all too suspicious and unnecessary tightening of monetary policy, which is strangling the economy, which is already showing strong signs of stagnating with inflation (stagflation).
“It must be conveyed that it is currently not prudent to discuss the possibility of cuts in the reference rate and that it must continue at its current level for a long time that allows us to observe substantial improvements in the inflationary outlook, while seeking to promote an orderly adjustment of the economy and the markets”, the minutes read.
That argument, of maintaining a restrictive stance to ensure convergence towards the 3 percent inflation target, is already counterproductive. BBVA Research economists stress the importance of a cycle of interest rate cuts to avoid excessive tightening of monetary policy, especially if the US Federal Reserve (Fed) decides to raise its rates again. And on that we agree.
US manufacturing data boosts gold prices
Meanwhile, the gold market is experiencing marked activity driven by flows of investors in search of a safe haven; this, in response to disappointing results from the US manufacturing and services sectors.
Preliminary data from the US S&P Global Flash Purchasing Managers’ Index (PMI) manufacturing has raised surprises by placing it at 47 percent, a significant drop from July, when it stood at 49 percent. . That figure has fallen short of consensus estimates from economists, who had expected a relatively stable reading of 48.9 percent.
In the last six months, the report underlines, activity in the service sector has reached its lowest point. And the response in the markets was not long in coming: gold price futures for December reached $1,946.50 per ounce.
The slowdown in business activity during August raises questions about the strength of US economic growth for the third quarter, as the services-led acceleration appears to have faded, accompanied by a further decline in manufacturing output, analysts at the information provider warn Financial S&P Global Market Intelligence.
The stagnation is already felt
Total that the economic stagnation is already noticeable in the United States and Mexico. Banxico seems more concerned with pleasing the President of the Republic – who likes to boast a very low exchange rate – than with achieving the long-term financial strength of the country and the peso.
But, as I told you, this will cause the party of the strong exchange rate to continue for the benefit of those who know (we know) how to take advantage of it, and to the misfortune of all those –such as exporters and remittance recipients, among others– who see their income unnecessarily penalized by misguided monetary policy.
Editor’s Note: This text belongs to our Opinion section and reflects only the author’s vision, not necessarily the High Level point of view.
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William Beard Master in Economics from the Austrian School; liberal, gold market specialist and editor of investment newsletter Top Money Report