In a monthly committee of economists in which I participate, we mentioned, half jokingly, that for decades we had been proclaiming that inflation in Mexico should converge towards that of the United States. Well, in October it was finally achieved, but at the high rate of 6.2% per year! Indeed, the two countries are exposed to strong upward price dynamics. A common reason that has been used in both cases is the supply shocks suffered as a result of the pandemic that have generated serious bottlenecks in various supply chains, which has pushed inflation upward.
The monetary authorities of both countries have indicated that the supply shocks are temporary, so that the inflation that is observed is transitory. Fortunately, in the United States, they are increasingly moving away from this narrative, recognizing that the argument of the temporality of inflation no longer has a place and that monetary policy has a role to guide expectations, even in the face of supply shocks. In Mexico we should not talk about temporary inflation that “corrects itself”.
The Federal Reserve adopted a two-step process: First, it will slow down its bond acquisition (tapering) by injecting less liquidity. Then, towards the end of 2022, it will start with a cycle of increases in its target interest rate.
The Bank of Mexico in its last four monetary policy decisions has increased the rate on each occasion by 25 basis points to reach 5% on November 11. The first two raises with a vote of 3 to 2 and the last two of 4 to 1. The dissenting vote has consistently been that of Lieutenant Governor Esquivel. When the Governing Board unanimously decided at its meeting on May 13 to leave the rate at 4%, the inflation expected by the Bank itself for the year was 3.6 percent. Now, in his latest decision, anticipated inflation for 2021 is 6.8 percent. So, what Esquivel defends is that, with that expected inflation, the rate should be 4%, since since May 13 he has voted to leave it at that level. There is clearly an inconsistency in Esquivel’s model, as a rate of 4% aligns for him with both 3.6% and 6.8% inflation. The biggest correction in her position was that of Deputy Governor Galia Borja, because when she voted on September 30 to increase the rate to 4.75%, she did so from a previous voting position of 4 percent. Several of us have argued that the last adjustment should have been greater to show more firmness in the commitment to control inflation, which is already a serious problem.
Arturo Herrera will assume as governor of the central bank (soon to be ratified by the Senate), facing this serious inflation environment. His position on monetary policy is unknown, and something will emerge from his appearance if senators ask him the pertinent questions. It has been speculated that a coalition could be formed in the Governing Board between Herrera-Borja-Esquivel as “doves” vs. the remaining two “hawks.” But that remains to be seen, in the central bank as in football there are also surprises.
Twitter: @frubli
Economist
IMEF Magazine
Economist graduated from ITAM. He has master’s and doctoral studies in monetary theory and policy, and international finance and trade. Columnist for El Economista. He has been an advisor to the Banxico Governing Board, Director of Institutional Linking, Director of External Relations and Coordinator of the Governor’s Office, Manager of External Relations, Manager of Macro-Financial Analysis, Assistant Manager of Macroeconomic Analysis, Assistant Manager of International Economy and Analyst.
Reference-www.eleconomista.com.mx