The pause in the Mexico rate cycle will begin with the next monetary announcement by the Bank of Mexico scheduled for May 18, estimated the director of strategy for Latin America at the investment bank TD Securities, Joel Virgen.
It foresees that the Governing Board of the central bank will reinforce the message of restriction in monetary conditions and that it will not formally close in its message the possibility of new adjustments.
interviewed by The Economistthe expert observed that there are four indications that Banco de México (Banxico) no longer requires driving new rate increments.
Refers to the downward trend in the components of merchandise in the Underlying inflation; the trajectory of the non-core inflation. The lower pressure that the National Producer Price Index (INPP) has maintained for several months now and the public statements by “a couple of members of the Governing Board” who have shown that they are already pondering the possibility of a pause in the cycle,
From New York, Joel Virgen emphasized that both the governor of Banxico, Victoria Rodríguez Ceja, and the deputy governor, Jonathan Heath, showed that they were already pondering the pause in the cycle, long before the Federal Open Market Committee of the Federal Reserve (FOMC) of the United States will rule on the April increase.
The governor of Bank of Mexico He commented in his annual appearance before senators, on April 26, that it should not be surprising if the Board stopped the rate cycle; while Deputy Governor Heath also said on April 26, in an interview with this newspaper, that the current level of inflation allows us to consider that we have reached the terminal rate
“Some board members sent indications that the majority would support a pause for May,” stressed the strategist.
glimpse restrictive tone
The investment bank strategist anticipates that in the May 18 monetary announcement, the Governing Board it will apply the first pause in a cycle that has been bullish for 15 consecutive announcements since June 2021, but will not fully close the door on further tightening.
We can expect a still restrictive statement, where they will emphasize that they will remain vigilant, willing to act if necessary, and clarify that their subsequent decisions will continue to be linked to previous data.
No central bank that has reached this point has tied its hands, nor has it explicitly said that it is closing the tightening cycle in the face of a climate of high inflation uncertainty, he noted.
We have already seen that we have all failed in inflation forecasts and that it can surprise us, so we do not expect a direct message telling us that there will be no more increases.
And without uploading it, it will continue to hawk
The expert considers that the monetary politics will continue to act on inflation even if the rate stops moving.
The restrictive work is not finished if Bank of Mexico pause the rise in rates, since the same expectations for 12 months of inflation will help to further tighten the ex ante real rate.
And the forward-looking guide will become the main tool of the central bank to facilitate the deceleration of expectations.
Deputy Governor Heath explained that in order to determine this restrictive stance, it was necessary to take as a reference the range of the neutral real rate, which was estimated by the Bank of Mexico between 1.80% and 3.40%, a proportion that results from the difference between the nominal rate and the expectations for 12 months to come.
Right now, the ex-ante real rate is at 6.58%, which results from the difference between the nominal rate, which is at 11.25%, and the inflation expectations for the next 12 months, collected by the Bank of Mexico in their monthly survey, they are at 4.67 percent.
This means that we are 300 points above the high range of the neutral rate in a clearly restrictive stance.
As expectations continue to slow, that real rate will continue to rise. That’s why you should keep the hawkish tone.
The TD Securities expert anticipates that the closing level of inflation for this 2023 it will be 5.2 percent. He clarified that it is the expectation that he has maintained throughout the year.
The deputy governor of Banxico, Galia Borja, explained to The Economistsince April 18, that monetary policy will remain restrictive for as long as it is necessary to make inflation fall and come closer to the single objective, which is 3% on time with a range of +/-1 percent.
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