If nothing extraordinary happens, next May, both the Federal Reserve Bank of the United States (Fed) and the Bank of Mexico (Banxico) will have reached their terminal rate and will pause the escalation that began more than a year ago. year, in March 2021. June will be the starting point of a period that the Fed itself has described as “analysis and evaluation” to determine the effectiveness of the monetary policy that it implemented.
The terminal rate is precisely the final rate that the central banks will reach in this process, after which it is assumed that two things could happen: resume the increases or start a period of decline in the interest rate.
Also, if nothing happens, the Fed’s terminal rate would be in a maximum range. 5.25 percent (let us not forget that the Fed currently manages its monetary policy through rate ranges), while in the case of Banco de México the terminal rate would be located at 11.50 percent; that is, in both cases an increase of 25 base points is expected for the next meeting in May.
There will be a difference of 625 base points between the terminal rate of Banxico and the Fedenough to maintain the attractiveness of the stock market and the Mexican currency for the duration of the pause of the central banks, always with the understanding that something extraordinary does not happen that forces us to modify everything.
But, the fact that central banks pause in their interest rate adjustments does not mean that the markets do nothing; that is, it does not mean that the markets do not move their interest rates.
Markets will continue adjusting rates according to expectations
The markets in general, and the banking system in particular, will not stop adjusting their interest rates.
It is important to point out the above because a pause by the central banks should not be seen as an automatic stoppage of the movements of the rates in the markets.
Depending on the conditions and circumstances, according to each institution, the adjustments will continue. Of course, there will be no extraordinary movements totally out of the market, not unless it is something anticipated.
But, for example, Rate movements in the banking system will be determined by the situation in the sector which, as we know, has been hit by a somewhat unexpected crisis.
Also, the level of the rates will be determined by the general conditions of the credit markets, which are very sensitive to any news coming from the sector. It is very possible that the little credit that is granted is done at higher costs, that is, higher interest rates.
In short, a pause in central banks cannot be interpreted as a similar performance in the markets.
The next appointment will be in January 2024
The Fed and virtually all of the world’s central banks will meet again in their respective monetary committees in January of next year.
Although the Fed meeting schedule for 2024 is not yet known, most likely, the central bank does not want to risk and let too much time pass in the following yearHopefully it shows that it has learned from its recent mistakes, such as refusing to acknowledge the spike in inflation until it was too late.
Regarding the expected movement of the rate in January 2024, the truth is that there is still no consensus.
It turns out that, although a 6-month horizon is not too much to make expectations, the impact on the market is very important.
Those who favor the start of the reduction in interest rates assure that by then inflation will have been controlled and will show a clear path of deceleration.
But, we are in unprecedented times, six months are few on the horizon, and many in the probability that something unforeseen may happen.