What to make of last Thursday’s interest rate hike by Banco de Mexico? (Banxico).
Banxico’s answer to the question says that the half-point increase from 4.25 to 4.75 percent rate aims at “keeping inflation and its expectations well anchored.”
In a press conference to appease the forever volatile peso-dollar exchange market, Banxico president Agustín Carstens also mentioned that there was no reason why the peso would continue on the devaluation slide as it is “undervalued.”
What many traders are reading is that in short, Banxico doesn’t give a hoot if the peso keeps free-floating as long as inflation is repressed and below an annual 3 percent.
Looking back to Dec. 2015, Banxico began increases on Dec. 17 by hiking the rate from .25 up to 3.25, the first increase since 2014. The U.S. Fed had done exactly the same rate upgrading one day before.
Yet the intent of the increase then — only 10 months ago — was to create a rate that would avoid a peso free-fall without much thought about inflation.
The trick worked then as the dollar cost 17.08 peso units and by the next day the value of the dollar dropped a little to 16.96. But the downwards bubble lasted shortly, as by the third of January the peso had lost 7 percent of its value pushed by the constant drop in oil prices.
In mid-February Banxico hit the upward rates button again with a half-point increase of the interest rate to 3.75 percent with adverse effects on Banxico’s wishful thinking attempts that the increase would again revalue the peso. The contrary became the truth as the peso closed on Feb. 18 at 18.28 to then level off for a short period at 18.25 until appreciation reached 5.3 percent.
There was a four month period of stability until June 23 when Albion voted in favor of Brexit.
Given the Brexit world-wide currency exchange turbulence, Banxico opted to increase the rate again to 4.25 in hopes that the peso would not be battered again by truly “outside factors,” but right away the peso lost 2.71 percent of its value.
This situation was the same until September when it became clear that the charlatan tirades of Donald Trump against Mexico on Aug. 30 made investors nervous, particularly after his visit to President Enrique Peña Nieto — considered demeaning and economically damaging by nearly everyone. Until then, “the Trump effect” had not been felt on the exchange currency.
Then the feeling that Democratic candidate Hillary Clinton won the first debate eased the market a bit until last Thursday when Banxico and its director Carstens opted for the new half-point hike.
Only this time the direction of the hike is different — at least in objective — than the one Banxico made last December. The objective now is to make the dollar more expensive in order to clamp down as much as feasible on the 13.5 percent devaluation the peso has suffered during the past 10-month period. But Banxico is also fully aware that the rate increase, no matter how high, is a source of inflationary pressure, which may, or may not work, as over the weekend the peso lost another .17 centavos against the greenback.
From the look of things, and like this writer opined last Friday, every interest rate increase by Banxico is like a coin tossed in the air, as there are no cannons or patterns to determine how currency buyers and sellers are going to react.
But that’s also why this time Banxico is placing its gambling chips on salvaging an effect on inflationary trends which — it hopes — will stay as low as possible, regardless of what the exchange rate is.
But special attention must be paid to the fact that given the constant increase on the interest rate, the market instruments Banxico is using no longer have a significant impact on the opinion of investors, who see no stability in sight in terms of the peso-dollar exchange-rates.
The coin’s in the air, again!