Economics: New push to expand Banxico mandate
The Workers Party (PT) recently proposed in Congress constitutional reforms aimed at expanding Banco de México’s constitutional mandate to include the promotion of economic growth and employment in addition to its current focus on defending “buying power”. It also aims to assure that the monetary authority would deploy its foreign currency reserves to promote productive investment, which would mark a clear reversal of the progress achieved in recent years in autonomy, financial stability and prices.
It is true that various central banks also have the sort of double mandate being proposed, but we at GEA believe that Banco de México’s effectiveness has been achieved most significantly in managing to anchor inflation expectations. The same cannot be said of its anti-inflation direct interest rate interventions, which have a highly muted impact owing to the country’s low degree of financial penetration and the domestic availability of credit. For that reason, if the bank were to be given a second batch of mandates and were to justify its monetary policy in either direction, we believe it would tend to heighten uncertainty and undermine the credibility of the bank in anchoring inflation expectations of economic agents.
To cite just a few examples of what it has meant for Mexico to have a central bank with a strictly anti-inflation mandate for the past 24 years, inflation has fallen considerably, as have interest rates and country risk. The currency’s buying power has been sustained at no expense to economic growth.
The federal government has been one of the main beneficiaries of this evolution. The lowering of inflation, and of interest rates, has made it possible to reassign a higher proportion of total government spending to other areas, including social programs. Debt servicing as a percentage of non petroleum tax revenues has declined from close to an average 180% between 2006 and 2014 to around 110% in the last two years.
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