Banxico: The markets expect the Bank of Mexico to raise the interest rate in Rodríguez’s first decision as governor

Victoria Rodríguez Ceja during the morning conference on November 4, 2021.
Victoria Rodríguez Ceja during the morning conference on November 4, 2021.

This Thursday the first monetary policy decision of the Governing Board headed by Governor Victoria Rodríguez, who took the reins of the Bank of Mexico on the first day of the year, after a controversial nomination by President Andrés Manuel López Obrador, will be announced. Her mandate is to preserve the purchasing power of Mexicans, a complicated task at a time when the economy is showing signs of weakness and inflation continues to rise.

Annual inflation reached 7.07% in January, according to the most recent data from the National Institute of Statistics and Geography (Inegi). A reference interest rate could contain inflation expectations, but also work against economic growth. Last week, the Inegi reported that the economy shrank -0.1% in the last quarter of last year. Spinning two quarters of economic contractions, Mexico entered a “technical” recession, according to analysts.

A third key factor that the central bank’s Governing Board will need to consider at its meeting on Thursday is the impending rate hike by the Federal Reserve (Fed), the central bank in the United States. The expectation is that the Fed will raise its rate in March as a first step towards a tighter monetary policy (or hawkish, as it is known). This has emerging countries concerned, since a higher rate in an economy as large and strong as the United States would imply a migration of capital. Central banks in Brazil and Chile, for example, have been among the most aggressive, raising their rates significantly in recent months.

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The Bank of Mexico, for its part, has raised rates five times since June, by a cumulative 150 basis points, while inflation remains well above the target of between 2% and 4% per year. “Both short-term and medium-term inflation expectations have risen,” Carlos Capistrán, chief economist at Bank of America, said in a report this week. “The Bank of Mexico will have to increase its inflation forecasts again. With the US Federal Reserve poised to hike and with other central banks aggressively hiking in the region, Banxico is under pressure to continue to hike despite very weak growth in Mexico.”

The new Governor, Rodríguez, is the first woman to lead the bank and the first to reach the top without having previously made a career within the bank. Her experience focuses on budget and public finance issues, and her career has always been close to López Obrador. At the time of her nomination, opposition legislators and analysts criticized the lack of experience of the candidate, an economist with a master’s degree from the College of Mexico (Colmex). “The new Governor is going to pull a little more on the growth issue, more dovish, and it has all the tools to justify it,” says Jesús Garza, professor at the Tecnológico de Monterrey business school, EGADE, and CEO of the financial firm GAMMA. Garza even expects the Board to announce a hike of 25 basis points, which would surprise the market.

“What the market thinks, that is, the expectation that they will rise 50 points, is somewhat distant from the political issue,” adds the specialist. Board member Gerardo Esquivel “has already done so, saying that the economy has not finished recovering, it is clearly slowing down and that raising the rate too much is going to be detrimental to growth.” López Obrador, who has argued on several occasions that the Bank of Mexico is also responsible for economic growth, has appointed four of the five members of the board.

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“Banco de México must raise 50 basis points,” says Garza, also a former central bank official, “the bank must anticipate a rise by the Fed and be very aggressive, also understanding that inflation continues to rise and that many central banks of countries emerging are doing it that way. This is the time to be aggressive because, later, the cost can be much higher.”

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George Holan

George Holan is chief editor at Plainsmen Post and has articles published in many notable publications in the last decade.

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