The Bank of Mexico (Banxico) will hold its first monetary policy meeting of the year this Thursday. The general expectation, the famous “market consensus” indicates that it will raise its reference rate by 25 base points, so that it reaches levels of 10.75 percent, still at its highest in more than two decades.
Beyond the adjustment, there is concern in the markets about Banxico: the path that the central bank will follow from now on.
Will Banxico disassociate itself from the Fed as of this moment? Will it stop adjusting its reference interest rate upwards and, on the contrary, could it begin to cut it from the second half of the year?
There are several scenarios that analysts are beginning to draw, but Banxico may not have many alternatives in its hands, if we look at what is happening beyond our borders.
The probable scenarios for Banxico
Some analysis houses have begun to draw scenarios after Banxico’s first monetary policy meeting this year; One that has become relevant is the possibility that Banxico could “distance” from the Fed after the meeting on Thursday, February 9, considering that it began the cycle of interest rate hikes before its US counterpart.
In this way, they consider that Banxico will raise its reference rate this Thursday by 25 base points, It will take it to levels of 10.75 percent and will no longer move it for the remainder of the first half of the yearsending the signal that their cycle of increases has ended and that from their point of view inflation is not only going down, but that it will also maintain that trajectory without the need for further monetary restriction.
After the first semester of the year and already with the evidence of the inflationary trajectory of the first six months of the year, Banxico would evaluate the possibility of starting the cut of its reference rate, the first adjustment would be moderate, The same 25 base points that he raised this Thursday could be lowered at his meeting scheduled for August 10.
Another forecast indicates that Banxico would no longer move its reference rate for the remainder of the year, and yes, it would decide to disengage from the Fed, considering that this central bank also pauses its interest rate hike cycle.
One more scenario indicates that Banxico would follow the Fed if it adjusts its reference rate once more, but it could even adjust to a lesser extent considering that there is some margin between the interest rates of both monetary institutions.
The scenarios change
However, the scenarios for our central bank can change, we are in a world that is too dynamic, but above all volatile.
Even from one day to the next, expectations can be adjusted, it is not something that is surprising and Banxico knows it too, surely it has considered several possibilities.
the fed speaks
Until the beginning of February, the possibility that Banxico would indeed break away from the Fed and after a similar adjustment decided to stay on the sidelines for the remainder of the year was gaining strength.
But the influence of the most important central bank on the planet cannot be so easily ignored; Banxico knows it too and the Fed has been sending signals in recent days that higher interest rates may be needed and longerGiven this, it is impossible not to take this factor into account.
Not to go too far, what the Fed said this week was surely considered by all the world’s central banks, Mexico’s also without the slightest doubt.
First, Fed Chairman Jerome Powell told an economists event that disinflation was already underway, but that it would be a painful, lengthy process, and not without risk.
Powell is not usually as cryptic in his language as some of his predecessors were; What he said is very clear. From his point of view, the decline in inflation is a fact, but it will not be something that happens overnight, nor will it be a smooth and risk-free process.
The head of the Fed is undoubtedly a very influential banker, but he is not the only voice within the organization and the voices of other members are also listened to carefully by the markets, so much so that many times they influence the mood more than Powell himself As investors, let’s remember that the Fed is a true collegiate body of economists and experts and that its decision-making mechanism truly considers the views of everyone who has a say at the time.
This Wednesday one of the Fed governors, Christopher Waller, told the media that his country’s economy is adjusting to higher interest rates, but that further increases in borrowing costs (rates) are needed to bring inflation back to the central bank’s 2% target.
“It could be a long fight, with interest rates higher for longer than some currently envision,” the official said. But he was even more forceful when he pointed out that “some believe that inflation will come down quite quickly this year, but I see no signs of this supposed rapid decline in economic data, we should prepare for a longer fight until we get inflation down to our target ”
For other Fed members who have spoken in recent days, including Powell, the country’s strong job market is a positive because, combined with declining inflation, it shows that the price rally was contained without destroying jobs. . However, this factor may put pressure on prices in the short and medium term, which may require a larger rate adjustment.
The projections of a terminal reference rate above 5.10 percent remain valid, but they do not rule out that it is older; practically all the members of the Fed maintain the speech in the sense that the rates will raise what is necessary.
Also in the United States they do not ignore a factor that, apparently, in Mexico we often leave aside: there they seem to be more aware that, although inflation has fallen, at the moment it is around 5 percent, it continues very high compared to the objective of 2 percent per year. We are talking about the fact that the current inflation rate is 3 times higher than the goal set by the monetary authorities, something disturbing.
Thus, Banxico will surely evaluate carefully whether it should disassociate itself from the Fed, the markets closely follow the correlation with the US central bank and strong evidence would be necessary to validate such a decision. whatAnd why the markets must validate a Banxico decision? Because like it or not, financial capital has a marked influence on the Mexican economy.