Mexico Central Bank prepared to act if inflation, risks stay low

(Bloomberg) — Mexico’s central bank could take monetary-policy action as soon as February if it sees that inflation as well as internal and external risks remain low, Governor Alejandro Diaz de Leon said in an interview.

“We have to monitor if conditions in the economy continue having this favorable trend in terms of inflation and lower external and internal risks, and if this occurs it allows us to take monetary-policy actions,” he said. “But this is precisely what we’ll be monitoring from now until the next decision.”

The central bank has cut borrowing costs by a quarter point in each of its past four rate decisions to 7.25%, but still has one of the highest real rates in the world. That’s fueled division within the board about how quickly it should ease monetary policy without risking a rebound in inflation and peso volatility.

Inflation has slowed markedly, and even fell below target to 2.63% in early December. The peso has been the best performing major emerging-market currency this year, gaining further after the U.S. House of Representatives voted for an updated North American free trade agreement with Mexico and Canada.

And earlier this month Mexico’s sovereign credit-default swaps fell to the lowest since 2014 as traders see risks receding.

Capital Flows

Diaz de Leon, who has voted with the majority for a cautious easing cycle, signaled that Mexico’s monetary policy may be better positioned to mitigate fluctuations in investor flows than to boost an economy that has low lending rates.

“Monetary-policy channels are different for different economies,” Diaz de Leon said in what he described as his last interview of 2019. “In Mexico, probably due to its low penetration in financing as a percentage of GDP, it has a credit channel and sensitivity to interest rates different than other economies.”

And yet “we’re an economy very open to capital flows,” he added.

He said, however, that the central bank isn’t “pre-announcing” future policy actions and will make its decision based on data available at the time of its meetings.

Dissenting Votes

Diaz de Leon said that Mexico’s minimum wage hike of 20% for 2020 is expected to have a moderate effect on inflation, but that there are risks of a greater impact. In its quarterly inflation report in February, Banxico could update its projections as more information becomes available, he said.

He wouldn’t respond to recent comments from fellow board member Gerardo Esquivel, who said on Twitter that those who criticize the wage hike seem to be using arguments from “Economy 101.”

Two out of five board members have repeatedly voted against the majority and for deeper half-point cuts amid concerns over an economy that dipped into a technical recession earlier this year.

In contrast to the prior three decisions, only one member voted for a deeper half-point cut in the December 19 meeting. All five members voted, said Diaz de Leon, after speculation arose that either Esquivel or Jonathan Heath, the two who had sought deeper cuts in previous meetings, had been absent.

Both Esquivel and Heath were appointed by President Andres Manuel Lopez Obrador, who has said in the past that he’d like to see lower rates. At the end of 2020, the president will get a chance to name a third member when Javier Guzman’s term expires, giving the president a majority of appointees on the board. That shouldn’t be a point of concern, said Diaz de Leon.

“We trust that the legal requirements and procedures that need to be carried out will result in the right candidates being picked for the board of governors, as has happened in the past,” he said.

Source: bloomberg.com

©2019 Bloomberg L.P.



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