The market will have to continue to expect when they will lower (or not) the reference interest rate, since the members of the Governing Board of the Bank of Mexico (Banxico) do not agree, with positions whether restrictive or flexible, although everyone is wondering – perhaps – if it would be appropriate to reduce it this year despite the fact that inflation exceeds the target range of 3 +/- one percentage point.
This is Banxico’s unique mandate: keep inflation low and stablebut the speeches of its members reveal that they have not reached a consensus on the strategy to follow, which could lead to a loss of credibility in the central bank.
In fact, The market does not believe that Banxico will be able to reduce inflation to the level it foresees towards the end of this year3.5 percent.
And the fact is that, instead of giving certainty, the various positions of the members of the Governing Board add to the unknowns, since there is no shortage of those who consider that there are already conditions in order to discuss the possibility of cuts in the next meetings, the one who calls for caution to avoid premature relaxation, or the one who calls for the reference rate to remain at its current level for longer.
At a press conference this Wednesday – to announce Banxico’s report for the October-December quarter of the previous year – Deputy Governor Jonathan Heath said it again: “I believe that it would be a huge mistake to start prematurely lowering the monetary policy rate much earlier” to be “very clear that we are really going to be able to win the battle in the time that we are designating.”
Heath’s position is appropriate, and in this space we share it: if the interest rate contributed enormously to the current overvaluation of the peso and containing inflation, begin relaxation soon – no matter how slowly it deflates that cheap exchange rate bubble. It will contribute to upward pressure on prices at the worst moment. Let us remember that 2024 is an electoral year and a record public deficit, in which rivers of legal and illegal money will flow en masse.
However, Heath qualified by considering that they could make a “fine adjustment” to the interest rate, of 25 basis points, but based on the real ex ante rate, which is nothing more than subtracting the expected inflation from the current rate, located a year ago at the record level of 11.25 percent.
That is, Heath’s proposal would not seek to begin to reduce Banxico’s restrictive monetary stance, but rather to maintain it practically at the same level to prevent a deterioration in inflationary expectations.
Risks to the economy
Of course, this first adjustment will depend on how the data evolve between now and the next meeting of the Governing Board (March 21), when they will reassess whether or not it is appropriate to lower interest rates. We think not.
In that sense, In the report presented at the same conference it is read that Banxico reduced its growth expectation for the Mexican economy for this year from 3 to 2.8 percent.a low significant drop in itself, but which becomes relevant because it results from the lower progress recorded in the fourth quarter of the previous year in relation to what was anticipated and the Q4 government would like to close the door with the highest possible growth.
I talk to you about a variable that fuels the unknowns that the Bank of Mexico must clear up, which identified several risks for the economy:
–Detriment to external demand for Mandxico. Despite the resilience shown by the United States economy, it cannot be ruled out that its growth will be lower than expected..
–Escalation of geopolitical conflictsticos. This would have an adverse impact on the global economy or international trade flows.
–More astringent financial conditions and/or episodes of volatility in international financial markets. They would affect financing flows for emerging economies.
–Gasto porwarlike. A risk if it entails a boost in the country’s economic activity below that anticipated and that investment spending is less than expected or insufficient to support the growth of the economy, particularly in the long term.
–Meteor phenomenalogic. For example, extreme temperatures or cyclones negatively impact national economic activity.
To this we can add that there is a lack of synchronization between monetary and fiscal policy, since the government wants to finish its works even at the cost of increasing the public deficit, which is incompatible with a restrictive monetary policy.
In Spanish: Banxico pulls the rope to lower the rise in prices while the government pulls in the opposite direction, wasting heavily.
Anyway, we agree with Heath that the best bet is to maintain the current monetary stance until we are sure that the battle against inflation will really be won, and we are already in the month in which we will see if Banxico chooses to fulfill its obligation constitutional to combat inflation or to play politics by lowering the interest rate to please the government, which, as I said, seeks to close its six-year term with the greatest economic growth possible.
Editor’s note: This text belongs to our Opinion section and reflects only the author’s view, not necessarily the point of view of High Level.
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William Barba Master in Economics from the Austrian School; liberal, gold market specialist and editor of the investment newsletter Top Money Report