Given the eventual crossroads that the Bank of Mexico (Banxico) could find itself in, between maintaining the pace of the escalation in the interest rate or stopping this increase at some point in the coming months, despite the fact that in the United States the Fed maintains its increases, it is worth analyzing what would be the factors that would help you make your decisions, starting this very week when it is your turn during your monetary policy meeting.
The most important thing is to monitor inflation expectations, based, of course, on the figures that the economy throws up; unfortunately there is no good news.
In the US there will be a new terminal tax, and in Mexico?
With Fed Chairman Jerome Powell’s words last week that it is still premature to stop the rate hikeit is clear that the rise in this indicator will extend beyond the first quarter of next year, a period that analysts considered a likely end to the increases.
According to the new expectations, the bullish period will now probably extend into the last quarter of next year, that is, The cost of money will continue to rise over the next 12 months.
A new terminal rate is also estimated, which makes sense if the Fed maintains its strategy, perhaps the pace will moderate, but the time will be extended.
According to the projections, the new terminal rate in the United States, that is, the maximum rate that the Fed would reach in this upward period, would be located at a level of 5.25 percent75 base points above the previous projection that was located at 4.5 percent.
If the rate differential between Mexico and the United States is maintained, the foregoing would mean that in our country the new terminal rate would be above 11 percent, between 11.25 and 11.50 percentwell above the expectation of a year ago, the effects of the impulse on general prices are more than evident.
The question is whether the Mexican central bank would be willing to assume a terminal rate at that level, taking into account that it started raising interest rates before the Fed.
input, it is almost a fact that during its meeting this week Banxico will have to raise its reference rate by 75 base pointswhich will mark a milestone, since with said decision the reference interest rate of our central bank will not only mark another record not seen since it uses the reference rate as a monetary policy tool, but also this will reach 10 percentSomething not seen in decades. At least two generations of Mexicans had never seen such a high level of interest rates in their lives.
Entrenched inflation?
Inflation has apparently begun to subside or at least to stabilize, at least that was shown in September with a reading of 8.7 percent, very similar to that of August.
But victory in the fight against inflation is far away, and Banxico knows it. The 8.7 percent reading is more than double the central bank’s maximum tolerance range, which stands at 4 percent, and also more than double the target, which we know is 3 percent. To end soon: inflation in Mexico is very high, at intolerable levels for the long term.
But if the inflation in its monthly reading is worrying, there are other figures on this same indicator that make the panorama even more risky.
According to the Bank of Mexico’s own survey, in its most recent edition, among economists who closely follow the performance of our country, inflation expectations do not have good news for us.
Final inflation for this year went from 8.48 to 8.54 percent, a few hundredths, but finally an upward revision that does not coincide with the expectations of a decrease in this vital indicator for the central bank’s monetary policy.
But if the projection for the end of this year has deteriorated, what is expected for a longer-term scenario?
By the year 2023, the new expectation speaks of a closing projection at 5.09 percent, a rate that exceeds the previous figure located at 4.81 percent; For its part, towards the year 2024, the projection went from 3.90 to 3.98 percent.
Regarding the expected inflation from 1 to 4 years, it rose from 3.97 to 4.08 percent, while for the period of 4 to 8 years the expectation increased from 2.64 to 3.66 percent.
These figures lead us to the following conclusions in force today, that is, in the photograph of this moment.
a) Inflation may have reached its peak, although it is not a guarantee that it will stay there and may not rebound at some point depending on the scenarios.
b) It is a fact that inflation will come down slowly; Thus, interest rates will not go back immediately eitherat least the first half of next year we will see reference rates in double digits, with all its implications.
c) The projections speak of an inflation that, at least in the short term, has or will have a certain root, which implies additional risks.
d) The abatement of inflation towards Banco de México’s objective, or at least within its tolerance margins, will be very long-term. The survey does not say that it will take 8 years to see said objective, but it is an indication that something like this will not happen for at least the next 2 years.
e) Banxico has few options for the following months. If he decides not to keep pace with the Fed, he could risk the Mexican economy to a deeper entrenchment of inflation.. However, the increase in interest rates will cause a slowdown in the first instance, and an eventual recession the higher the rate hikes.
However, Banxico’s mandate is clear and unique; maintain the purchasing power of the currency, and if something deteriorates the purchasing power it is precisely inflation. Therefore, Banxico will have to keep pace with the Fed even against the criticism it receives, at the risk that future generations will suffer a phenomenon that will impact its pocket permanently.
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