Mexican citizen by birth and under 65 years of age at the beginning of his / her position. Have recognized competence in monetary matters and have held, for at least five years, high-level positions in the Mexican financial system or in any financial authority. That is what the law establishes for those who aspire to be members of the Governing Board of Banco de México.
They say that monetary policy is more art than science. The degree of difficulty that the country’s monetary management entails is light years away from what is needed to carry out any fiscal policy. The technical robustness requirements are there for a reason. You have to understand economics, but also know the financial markets and understand world capital movements and their interconnection with the real economy. In conducting monetary policy, it is necessary to know how to navigate a sea of complex variables, keeping a cool head and isolated from political movements that try to divert the route.
The management of the central bank should be separated from fiscal policy to prevent the former from functioning as the banknote printer for the latter. In a context in which the central bank depended on the executive, it would lend itself to seeing the monetary authority as a financing tool. We have already seen versions of that movie and there is no happy ending in any of them. They have been horror movies, in fact, for Mexican families. It is enough to remember the decades of the seventies and eighties to understand the risks of monetizing public deficits. Hence the need for an autonomous central bank, with technical capacity and, of course, with full decision-making capacity aimed at the objectives – the objective in the case of Mexico – established by law.
Banco de México is governed by a Governing Board with five members. Of them, four are deputy governors and the fifth is the Governor of the Bank, a position that Alejandro Díaz de León occupies today and who ends his post on the last day of December. Díaz de León could have followed a second term, but it was the president who, in advance, clarified that it would not be this way. In June, six months earlier than necessary, López Obrador announced that he would nominate then-Treasury Secretary Arturo Herrera for the position.
Let’s start there. Alejandro Díaz de León has done an excellent job at the helm of Banco de México, giving investors certainty about the technical quality of that institution’s decisions. The central bank, during the pandemic, made use of all the monetary tools at its disposal to facilitate liquidity at the most critical moment in recent economic history. A second term for Díaz de León would have been more than welcome in the Mexican and international financial community.
However, the would not exist and the president decided to replace his then Secretary of the Treasury by sending him to the Bank of Mexico. Herrera left the secretariat in July and the appearance he had before the permanent commission of Congress in August, just to discuss his future assignment, was canceled. And this week we learned that López Obrador in fact announced that he would not be ratified.
So far I do not know the reasons why the president changed his decision and has appointed Victoria Rodríguez to the position. But I do know that there are few things as important to a country’s macroeconomic stability as good monetary policy management. Today, Banco de México’s main objective is to ensure the stability of the purchasing power of the national currency.
Beyond technical definitions, we all understand inflation. We live it. We realize when the purchase in the supermarket is more expensive, when we pay more for electricity and when the gas tank is left half for the same with what was previously filled. The recent increase in this indicator had an impact on an increase in working poverty of more than one million people between the second and third quarters of the year; terrible figures for a country that should be in full economic recovery.
The debate has long existed as to whether Mexico’s central bank should have a dual objective, as in the United States, an inflation target seeking full employment. When reading the minutes of the monetary policy meetings of the Governing Board, it is clear that the rate decisions made there implicitly consider factors such as economic growth and the labor market, as well as the national and international context of the moment. Isolated decisions are not made without context, but the priority objective remains to maintain the stability of the purchasing power of the currency.
The North American reality is different from the Mexican one. In Mexico, we have seen the temptations materialize to use the central bank as a banknote machine to finance public spending and thus, in theory, achieve economic growth. Consequently, the inflation achieved undermined the purchasing power of Mexicans’ income, plunging millions into poverty. Today, fortunately, the Bank’s institutional machinery prevents this from happening. The strength of the Governing Board, its independence and the technical nature of its members allow the central bank to continue to be a fundamental pillar of the Mexican economy.
The management of monetary policy should not be subject to government spending. The Bank of Mexico has one of the priority functions of the Mexican economy: to maintain the certainty that those notes and coins that we use as a means of exchange continue to serve for this purpose. The autonomy of Banco de México is there for a reason. It must be defended.
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