The Bank of Mexico remains one of the central banks of emerging economies that took the least anticipation to react to inflationary pressure, warned analysts from Oxford Economics.
But it is still early to conclude whether the caution to raise rates or the early aggressiveness shown by the Central Bank of Russia and the Bank of Brazil is having better results.
Inside the discussion titled “Emerging Market Central Banks – Ahead or Around the Curve?” They detailed that with four increases in interest rates of a magnitude of a quarter of a point each, which began in June, Banxico is among the three emerging countries that are “least advanced” in the face of the challenge of the inflation shock and the dismantling of expansionary policies in advanced economies.
The benchmark interest rate in Mexico is currently at 5 percent.
Along with the Bank of Mexico, the least developed central banks – as consulting experts call them – are those of Egypt, India and Colombia, whose rates are at 8.25, 4 and 2.50%, respectively.
The South American central bank has only risen 50 basis points in the year; that of Egypt cut its rate by half a point in its first move this year (against the tide of emerging markets); while that of India has not made a single movement in all of 2021.
In the analysis, the director of macro research and global strategy for emerging countries, Gabriel Sterne, underlined that it is not surprising that emerging countries were ahead of the rate hike in the face of inflation pressure, as they have a young credibility.
Getting too far ahead, a risk
“Being ahead of the curve sounds like an attractive place for central banks. Furthermore, they know that rate hikes can decisively reassure the markets to nip the forces of inflation in the bud and unleash surges into bonds, ”they highlighted.
However, they warn that “everything can go wrong when they get too far ahead of advanced economies in a context of increasing pressure on prices and when they have less solid credibility.”
They said that “Brazil’s fiscal situation could be a determining factor for the central bank’s aggressiveness and perhaps that is what explains its early reaction.”
By including fiscal conditions in the analysis, it highlights that Mexico has had a strong tendency to maintain stable public finances in the midst of the pandemic and recovery, and therefore the position of the central bank seems consistent with this position.
No certainties yet about diagnosis and solutions
In the analysis they state that there is no clear evidence so far as to which of them has been more accurate in their diagnosis of inflation risk.
“Everything can go wrong if the economic context is unfavorable, if external inflation shocks remain persistent and if a normalization trend in price dynamics has not been restored.”
If monetary policy exaggerates inflationary forces it could lead to macrovolatility and capital outflows, they emphasized.
This would be a risk in the case of the Czech Republic whose monetary policy is already above neutrality. This central bank has increased its rate four times since June, this month it left it at 2.75 percent. For central banks that are behind the curve, as in Colombia and Egypt, investors can be compensated.