Runaway inflation puts the new Bank of Mexico to the test

Victoria Rodríguez Ceja, during the morning conference on November 4 in Mexico City.
Victoria Rodríguez Ceja, during the morning conference on November 4 in Mexico City.PRESIDENCY OF MEXICO

Mexico this week registered the highest price spike in two decades. Runaway inflation is hitting the entire world in the aftermath of the pandemic: the rebound effect of demand and misalignments even in global supply chains. The debate centers on determining how long the inflationary hangover will last. The general conclusion is that this is a temporary pain and the barrels are not worth taking out just yet. Although for now, in Mexico everything seems to indicate that the central bank will raise the interest rate next week for the fifth time so far this year. It will be the last decision of the current management team, which in January will pass the baton to Victoria Rodríguez Ceja, the last bet of Andrés Manuel Lopez Obrador, surrounded by uncertainty due to his lack of experience in monetary policy.

The record for the price index in Mexico -7.3%, the highest since 2001- is in tune with the peaks also in Europe or the United States, where inflation has not been so high for more than three decades. Prudence dominates for now in the two large squares. Neither the European Central Bank (ECB) nor the Federal Reserve (Fed) have hit the reference rates or stimulus programs for fear of affecting the incipient recovery of the economy after the pandemic. Next week, in any case, the Fed can begin to put the brakes on with a progressive reduction in bond purchases. Especially when the labor market again showed signs of strength: unemployment claims fell to levels never seen since 1969.

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Despite sharing the same causes of the inflation outbreak, the outlook in Mexico is somewhat different. The López Obrador government has been one of the most conservative to react with public money to the COVID blow, while the economic recovery is fueling at a slower pace. After lifting its head in the middle of the year, the GDP for the third quarter registered a further fall (0.4%). A skid, moreover, greater than expected due to the poor performance of the services sector, a key driver with the reopening of establishments after the worst moments of the pandemic and with a job market that has not yet managed to absorb the outputs caused by the crisis.

This is the scenario with which he will find the new governor of the Bank of Mexico. “We are in an extremely complicated environment,” warns the chief economist of BBVA in Mexico, Carlos Serrano. Furthermore, given the nature of the shocks, monetary policy is largely ineffective. In the face of bottlenecks in the distribution of inputs and goods, there is little that central banks can do directly. Rather, it is advisable to be cautious, use communication to explain that we are not facing a price increase due to structural reasons. And tighten monetary policy only if expectations are not met because overly restrictive actions would slow down the economic recovery ”.

Given the flood that already more than double the 3% goal set by Banxico, the agency has carried out a progressive rate hike that will most likely culminate next week with a new increase to 5.25%. The risks that higher and higher rates represent more sticks in the recovery wheel are justified in that Mexico is not suffering from a warming of inflation due to a growing demand for credit. Rather the complete opposite. Until the middle of the year, new credit fell 3% according to data from Banxico itself. A rise in defenses would further discourage credit, one of the country’s great pending challenges.

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The danger that price rises are transferred to wages also seems far away, as if it could happen in the United States, generating a vicious cycle that feeds itself. “Despite recent increases in the minimum wage, wages in Mexico had plummeted over the past decades so there is more than enough room. Furthermore, the labor market continues to be weak and has not fully recovered ”, adds the chief economist of BBVA.

Global forecasts are that inflationary pressure will decrease as ports and other logistics centers return to operating at full capacity and energy demand stabilizes after the rebound effect. By the middle of next year the waters should have returned to their course. The market consensus also anticipates a reduction in inflation of almost half (4%) by 2022 in Mexico, closer to the Bank of Mexico’s goal.

From the Confederation of Industrial Chambers (Concamin), his head of economic affairs, José Luis de la Cruz, also warns of the limitations of monetary policies to tackle the situation. “We need new forms of economic policy such as increasing productivity, the best tool to cushion inflation and not be so exposed to fluctuations in international prices,” closes the economist.

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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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