The signs are so clear that it would be impossible not to see them. The Bank of Mexico (Banxico) will never say so explicitly, but it would be willing to cause a moderate recession in the Mexican economy, as long as it returns the inflation target to 3 percent plus/minus one point.
Our central bank has not only not paused its rate hikes, as some analysts claimed it would happen in the first three months of this year, but it also seems that it will follow the Fed in a synchronization that any team participating in the Olympic Games would envy. whatever discipline it was.
In the international markets, there is a firm conviction that the US central bank, the Fed, is willing to cause a moderate recession in its economy, in order to return the inflation rate to the target that it has located at 2 percent.
The synchronization in Banxico is similar, our monetary institution seems to be a faithful copy of its counterpart in the United States, here are some points.
1) Since the Fed began its escalation, even before, Banxico has done the same, except on one occasion and it was to increase its rate even more. It was at the previous meeting, the one in February, when it determined an increase of 50 base points, despite the fact that the Fed had previously raised its interest rate by 25 base points.
2) The number of “hawks” in Banxico is striking, everything seems to indicate that the governing board is practically taken over at this moment by them; the only “dove” was the sub-governor Gerardo Esquivelbut it was not ratified last December by the acting government.
3) The real interest rate at this moment is around levels of 4 percent; even a benefit of this magnitude in real interest (nominal rate minus inflation, had not been seen for more than two decades, in 2000 there was a similar benefit, but under different circumstances. This performance is, of course, encouraged by our central bank.
4) The nominal rate of 11.25 percent is already recessive in fact, we will see its effects in the coming months, although we do not know if by then the economy would have even overcome a brief recessive period of which we are not aware. With an estimated GDP in 2023 of 1.5 percent at best, inflation of 7.15 percent and a rate of 11.25 percent, the possibility of a recession is very high.
5) The big bet is the economic recovery in the United States, driven by the voracious demand for products in the most consumerist market in the world, together with the relocation of investments (nearshoring), to get our country’s economy out of a possible recession .
6) Although the recent crisis that broke out in the United States banking system set off alerts in the world and, of course, in Mexico, it seems that everything is going well in our banking system, at least for the moment. The above, allows Banxico to maintain its roadmap in the fight against inflationand that includes the possibility of a moderate recession.
7) Another great ally for Banxico and the Mexican economy to come out ahead in an eventual moderate recession is the exchange rate. The exchange parity is constantly strengthened by the levels of local interest rates versus those of its main trading partner. This factor is very relevant because as we know, in Mexico the exchange rate has a strong inflationary influence, so that a strong peso greatly reduces the task of Banxico to keep inflation at bay, or control it when it gets out of control.
As we pointed out lines above, Banxico’s current reference rate, located since yesterday at 11.25 percent annually, is already recessive by itself and under the current economic circumstances. Will a recession happen or not? We will see, but Banxico seems to send signals that, like the Fed, it does not look bad a moderate recessive period in the country.
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