Economics: Perception of Banxico's following the Fed poses medium-term risks
In the wake of the Federal Reserve’s March 16 quarter-point tightening and notification that it has the intention to raise borrowing costs at each successive rate review scheduled for the current year, Mexico’s central bank did not take long to respond. While this was the Fed’s initial rate liftoff, in Mexico, a largely imported surge in inflation dating back to June 2021 has made the central bank double the interbank target rate to 6.00%, but now it seems that it is trying to mirror the Fed’s move by taking on another 50 basis points just this past Friday. And unlike the previous six increases, this time all five members of the Banxico board agreed with the increase.
Moving forward, what is most troubling should Mexico be perceived as tracking Fed rate policy, despite claims to the contrary from the new Banxico president, are the potential risks this could pose in terms of higher credit costs, expanding non performing loan portfolios and additional deceleration of the weak economic growth expected for 2022. But the greatest short-term effect would be to inject greater fragility into public finances due to the steeper debt-servicing costs and the revenue shortfall that accompanies stagnant economic activity. It is estimated by the market that the reference interest rate could average 6.7%% this year, which would push the public sector’s financial expenses to 135.9 billion pesos per year. Over the medium term, and only after "imported" inflation begins to subside in response to such an ebbing in the US, the challenge will be how, when and at what pace should monetary policy be eased back into neutral, thereby allowing for a mitigation of that pressure on government finance.
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