This Wednesday the deputy governor of the Bank of Mexico, Gerardo Esquivel, urged his counterparts on the governing board to assume definitions in the monetary policy of the Mexican central bank.
Esquivel pointed out in an interview with Reuters that it is very inconvenient to take the monetary stance in Mexico to excessively restrictive levelsin an effort to bring down inflation, albeit at the cost of a fragile local economyso you should start thinking about closing the key rate’s bullish cycle.
The deputy governor stated that, although it is true that Banxico must comply with its mandate to control inflationit cannot do it at any cost, because it could lead to a slowdown in an economy that it sees as fragile and vulnerable.
In this sense, Esquivel said that it is urgent to define Banxico’s terminal rate once and for all in this upward cycle, since by doing so the discussion in the governing board would be modified and the issue would be how long to maintain said terminal rate.
The discussion, as always, seems alien to the bulk of the population, also as we will always be wrong to think that, the matter is closer to the common citizen than is thought.
But let’s first see what this “terminal rate” is, and what happens inside Banxico’s governing board, to try to understand where we are going in the coming months.
terminal fee; easy to say, hard to place
The terminal tax to which Gerardo Esquivel refers is nothing more than the maximum rate that the reference rate itself should reach (as we know, it is the monetary policy tool of the central bank), in this period or upward cycle assumed by Banxico, in line with practically all the central banks of the world.
As we know, just last September 29 Banxico raised its interest rate to a maximum of 9.25 percent, but the escalation should continue if we stick to the expected actions by the United States Federal Reserve Bank (Fed), entity that will maintain its rate hike policy. It is estimated that at the end of the year Banxico’s reference rate will be close to 10.5 percentand that it continues to rise next year, at least in the first half.
Therein lies the problem; In fact, Banxico’s monetary policy is closely linked to what happens in the rest of the world, especially in the industrialized nations, and very preponderantly in the United States.
So a terminal rate in the central bank of Mexico would be linked to a similar situation in other economies and other central banks. There are some expectations about the level that interest rates should reach in the coming months in our country, but there is no absolute certainty because we are in one of the most complicated contexts. Reaching or defining a terminal tax in Mexico depends on many factorsseveral of them, perhaps the most relevant, are outside the control of the Mexican central bank.
Term of the terminal rate, there would be no certainty either
The other part of the discussion, according to Esquivel, would be that once the terminal rate is defined, that is, the maximum rate to which Banxico will take the reference rate, a consensus must be reached in the Banxico Governing Board on until when should said rate be maintained in the Mexican economy.
This term would be immovable and, later, the rate must begin to be cut, in order to take it to where its equilibrium level is for the market.
What the deputy governor of Banxico is asking for makes sense, that is what should happen, except that the context in which we find ourselves needs to be considered.
The terminal tax is at this moment a concept that not even the US central bank itself dares to consider. The watchword at this time is to bring down inflation at whatever cost; Without saying so, the Fed has said or hinted that if that cost is a recession, it won’t matter. The phrase “some pain to reach the objective”, pronounced recently by the president of the Fed, Jerome Powell, leaves no room for doubt, the priority is the fight against inflation.
Gerardo Esquivel is surely among the economists who thinks that the economy of our country has somewhat different circumstances that would allow it to detach itself from the monetary cycle in the United States, something that could be true, but for which there is still no full evidence.
Thus, in the distant event that Banxico is able to determine a terminal rate, setting a term for that same rate would be somewhat complicated, that would not make sense in a geoeconomic scenario like the one we are currently experiencing. What happens outside our borders maintains a much higher specific weight than what happens internally.
How does it affect or benefit the common citizen?
For the moment, the disagreements in Banxico’s governing board have not been reflected in financial instability or uncertainty, but it could happen.
The increase in the interest rate by itself has the potential to affect the entire citizen context, as in fact happens, but if the above is add a scenario of disagreement between those who have the task of setting a key indicator and as delicate for the country as the reference rate is, Mexico would have an additional problem.
It is not superfluous to point out the political context that dominates in Mexico; The government in power has openly criticized the strategy of raising interest rates and, without hesitation, has said that it should be reversed in order, according to its point of view, to boost economic development and growth.
The words of Deputy Governor Esquivel are not gratuitous or broadcast on the air, at those levels, in almost any central bank in the world, they have objectives and recipients, we know that Gerardo Esquivel has struggled to moderate the rate hike, although at the time of greatest economic tension he supported the escalation, but he has always made it clear that he does not want hikes that from his point of view are excessive.
Today, it seems to focus on two goals; The first of these is to stop, if not immediately then sooner rather than later, the rate hike by fixing a terminal rate. The second of them is to set a deadline to start lowering that same rate.
The problem is that nobody knows the future. Esquivel does not want there to be an excess in the increase in interest rates, but we will hardly know at this time how far the “excess” is defined and how far the “need” for high rates.
Meanwhile, the common citizen will continue to be caught in the middle, not so much because of the struggle in the Banxico governing board, but because the crisis continues.
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