It seems imminent that this very week Mexico’s Central Bank (Banxico) will hike its interest rate by one percent from 4.75 to 5.75.
This would be the fourth increase Mexico applies for this year (the previous ones were Feb. 18, June 30 and Sept. 29) and all hints that the upcoming surge will come Thursday. Originally the apparent plans were to raise the rate by .75 but Banxico president Agustín Carstens is seeing “threats” to the current economic policy that may affect the course of stability into 2017.
Ironically none of the causes are political. Carstens is watching the market movements and has placed aside what the new presidency of the United States may bring when it arrives January 20. In the meantime, the only thing that seems to matter to Banxico is sheer current currency pragmatism.
The main reason for the increase is that the stalwart policy Carstens is following of low inflation has now entered into a potential spiral that must be avoided, as Banxico’s prides that for the past couple of years inflation has stayed below three percent. But according the latest Citibanamex poll, inflation is now up to 3.5 percent, three points up from the 3.2 percent the economy started at in January 2016.
It is clear that the 25 percent peso devaluation for 2016 has made a dent in the economic policy and it reflects the three previous increases. This deterioration of the Mexican currency does not go unnoticed to Banxico — in fact, it is terribly worrying — because over the past two months the trend has gone upwards, pushed particularly by the now defined U.S. political scenario for next year. But still, 25 percent devaluation in one year means a lot of purchasing loss for Mexicans.
The current “historical” volatility of the devaluation is an added point to increase the interest rate as it seems to be the only tool Banxico has at the moment to prevent further loss of purchasing power by the peso, which, says Citibanamex, is “under-performing” when compared to other currencies.
The hike is seen as “an incentive” to bring the exchange markets to a more stable behavior in the near offing.
A minor influence considered by Banxico in the upcoming decision, if taken, is to help the stability of the Mexican Stock Market (Bolsa) portfolios which need to maintain their level given that they work under a fixed rate system that can be easily rattled by the constant exchange surges seen, particularly this past week, which by the way, seems to have stabilized at under 21 pesos per dollar.
Investors have their back-up insurance and they are expecting an increase of at least .90 percent in their Interbank Interest Balanced Rates (TIIE), in which the swaps go in tandem with current exchange rates.
Yet, again, the Citibanamex study says that they are not the leading reaction why Banxico may increase the interest rate practically on the double.
Citibanamex analyst Joel Virgen, who was directly involved in the poll, says that the one percent hike coming up Thursday will not go into effect, surrounded by a series of collateral problems, such as placing funding on external rates within a restrictive territory.
Given international conditions, “each new increase in the policy of monetary politics will be more difficult to materialize as its cost is upwardly bound,” says Joel Virgen in his personal (not Citibanamex) interpretation of the upcoming 1 percent increase. (El Financiero, Nov. 15).
But the new hike would bring much needed momentary stability in order to preserve the inflationary trend from getting out of hand, which is Carstens worst fear.
