Banxico’s mandate is to maintain price stability, which translates into keeping inflation converging at 3% per year within a target range of 2-4%. However, during 2021, while inflation was considered transitory, month after month inflationary surprises were observed that deteriorated this discourse, ending the year with the highest inflation since 2001.
This resonated and caused a change in monetary policy diametrically opposed to the one at the beginning of 2021, when Banxico was still lowering its interest rate. However, a restrictive monetary policy is less useful when inflation is imported, as has been the case in Mexico during 2021 and possibly 2022. So why will Banxico continue to raise its reference rate?
In short, 10 months with annual inflation above the target range and expectations that the next 13 months will remain above 4%, which means that inflation will be outside the range for almost 2 years. This, together with other factors, is what caused Banxico, along with other banks, to abandon the discourse that high inflation is transitory and to try to contain inflation expectations beyond a year.
Among the other banks, there is the United States, the Fed, which reduced its reference rate between zero and a quarter of a percentage point (0.25%) during the pandemic and now intends to raise rates as soon as March and between two and four times more during the year. This change is generating pressure at a global level, since both corporations and other countries take US rates as a base and if they go up, all the others will too.
With this we have seen the amount of debt paying negative rates fall from a peak during the pandemic of 18.3 trillion dollars (21% of global GDP) to just 7.6 trillion dollars. Thus the era of easymoney could be coming to an end.
Mexico is no exception and Banxico in its last meeting quickened its pace, and instead of raising its reference rate by a quarter of a point, it did so by half a point (0.5%). Furthermore, the expectation is that in its next meeting it will continue with the same rhythm, with which the reference rate could reach 6% at the end of February and up to 6.75% towards the end of the year. And, although the effect on inflation will be marginal, given the lesser experience in monetary policy of the governor of Banxico, it is desirable that the greatest possible orthodoxy be shown in the next decisions of the central bank and that investors believe in the commitment of the institution to seek price stability.