The announcement of annual inflation of 7.88% for the first half of June coincided on the same day with the monetary policy decision to increase the interbank rate by 75 basis points (bp) to reach 7.75 percent. This simultaneity reinforced the action of Banco de México. The unanimous decision of the Governing Board (JG) of 5-0 was a good indication of the commitment they have to anchor inflation expectations. We will have to wait for the minutes of that meeting to find out if the option of a 100 bp increase was on the discussion table, a possibility that several analysts favored. In any case, probably in its next monetary decision meeting, on August 11, the discussion will be between adjusting 75 or 100 bp.
As always, in the brief statement announcing the decision, you have to read between the lines. The JG sends a message about its future commitment to manage monetary policy, with a force that it had not done before. Consistent with its monetary policy scheme known as “inflation forecast targeting”, communication and transparency build credibility between the public and the markets. This communicative practice is known as “forward guidance” and the following sentence of the statement clearly establishes that commitment: “In the following decisions, the Governing Board intends to continue increasing the reference rate and will assess acting with the same forcefulness in case it is required”.
The release also includes a table with the Bank’s inflation forecasts which is very useful. However, further explanation is needed in this regard. Without entering into the controversy of whether the Bank should reveal its complete forecasting model and its reaction-function, what is needed is to detail the assumptions. For example, the Ministry of Finance recognizes that, if the IEPS on gasoline was not being subsidized 100%, inflation would be greater than 10 percent. As this is a measure to artificially suppress inflation, the JG should also present the forecasts without the subsidy, in order to know the true expected inflation. In addition, the Bank has the capacity, since it has an internal methodology that approximates inflation on a daily basis. It would seem that for its decision the JG considers that the subsidy will continue, which is why its forecasts for the following quarters are 8.1%, 7.5% and 6.5 percent.
Similarly, the JG foresees a sharp drop in inflation as of the second quarter of 2023. It does not explain it, but it is intuited that the assumption behind it is that the supply bottlenecks are corrected, as it is anticipating the Federal Reserve (Fed). Although this will contribute to lowering inflation, a key domestic factor that is an important impediment to lower inflation is the stagnation of private investment, which is expected to continue. For that reason alone, the spread between Mexico’s rate and the Fed’s will have to remain wide (600 bp at present). So the interest rate bull cycle could continue throughout 2023.
Twitter:@frubli
Economist
IMEF Magazine
Economist graduated from ITAM. He has a Master’s degree and doctoral studies in monetary theory and policy, and international finance and trade. Columnist for The Economist. He has been an advisor to the Board of Governors of Banxico, Director of Institutional Liaison, Director of External Relations and Coordinator of the Governor’s Office, Manager of External Relations, Manager of Macrofinancial Analysis, Deputy Manager of Macroeconomic Analysis, Deputy Manager of International Economy and Analyst .