Banco de México has to increase the reference interest rate at its meeting on March 24 by at least the same magnitude as the Federal Open Market Committee (FOMC) did – a quarter of a point , to maintain the attractiveness of Mexican bonds and reduce the risk of capital outflows. This is how the director for Latin America at the Moody’s Analytics business consultancy, Alfredo Coutiño, sees it.

In reality, Mexico has to face a bigger problem than it did last year when it was only facing the increasing rate of inflation, he warned.

At this time that the rate in the United States has risen, Mexico also faces the risk of a sudden change in capital that can also have an impact on prices, on stability and that would add uncertainty to the market.

Interviewed by El Economista, he observed that it would be convenient for the Governing Board to promote two additional increases of 50 basis points at the meetings in March and May, to leave the rate at 7 percent. This space would allow you to smooth out the increases that should continue in the second part of the year.

The expert argues that Mexico cannot be left behind the Federal Reserve, as it has been behind the upward pressure of inflation. Now it has to offer higher yields to foreigners who are placed in Mexican bonds to avoid sudden capital outflows.

Strengthen attractive

In addition, the deputy director of Economic Analysis at Monex, Janneth Quiroz, explained that Banco de México has historically sought to maintain a restrictive bias when the Fed tightens its policy, as it helps prevent capital flight.

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The strategist explains that in periods of uncertainty, the demand for risk-free instruments increases. And if the short-term interest rate in the United States has already risen, it is more attractive and Mexico has to remain competitive.

In addition, he said that if there are capital outflows, there will be an exchange depreciation that usually generates pressure on merchandise prices and if it is consistent, it will also affect inflation.

The cost of not acting

From Philadelphia, Coutiño stressed that regardless of the increase in oil prices, as a result of the invasion of Ukraine, inflation in Mexico already had a well-defined nature, it was not transitory and it had been known since last year.

That is what the subjacent inflation indicates, which has given no sign of either stabilizing or intending to trend downward, he stressed.

The core indicator allows to know the structural inflation since it discounts from the measurement the prices that are usually volatile due to seasonal situations. This indicator went from an annual 3.83% in the first fortnight of January of last year to 7.22% in February 2022. This means that in 13 months, which are 26 fortnightly reports, structural inflation has doubled and more than the specific objective.

Six more increases, apart from the one in March

Besides, the chief economist for Latin America at Rankia, Humberto Calzada, explains that the global uncertainty due to the conflict between Russia and Ukraine is transferred to the forecast of the next movements of the rate in Mexico.

However, he admits that there is a high possibility that the rate will move in line with the increases in the United States. Thus, he expects six more increases by the Federal Reserve, which could be replicated in Mexico.

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Mexico’s next currency meetings are scheduled for March 24; May 12, June 23; August 11; September 29, November 10 and December 15.

The Fed’s decision was taken by majority, where only one of the members, the president of the St. Louis Reserve, James Bullard, called for an increase of 50 basis points.

The Fed also changed its growth forecast for the US to 2.8% from 4%.

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