Monetary policy under pressure

The negative effects of the interruption of global supply chains put monetary policy under pressure.

At the end of the year, inflation would reach 6.5% outside of Banxico’s target range, to which the estimated growth of the economy of 5.8 percent is added. Despite the above, we have low inflation in relation to the region, for example, Argentina with a prospect of ending at 60%, 10 times higher than Mexico. In Canada it will be around 4.8%, the US at 5.3%, and England 3%. What is the problem? The answer is that the failures in the distribution and supply chains will continue to be affected until the second half of next year, consequently prices, rates and the exchange rate will be parked at a new floor that will be difficult to lower.

Solidly integrated, the North American region faces challenges as a result of high price indexes for both the producer and the consumer, which are obviously spread between partners. We export inflation at the same time that we import it. Due to the uneven economic recovery, the effect of communicating vessels may last longer than estimated. Consequently, our monetary policy will have to be adjusted, making the cost of money more expensive, through the withdrawal of liquidity or high interest rates. For the last part of the year we can expect an increase of 50 basis points. In this logic, it is obliged to follow the restrictive decisions of our business partners. The rhythm and sequence must be harmonious between Canada, the US and Mexico. Suffice it to remember the disastrous results when money cycles are not properly matched. In the 80’s, the debt crisis in Latin American countries known as the lost decade, resulted from the unusual increase in the interest rate of funds in the US that reached 19 percent. Another case, the “December error” had as an external cause, the increase of 250 basis points. Likewise, the severe exchange rate adjustment of the past six-year term was accompanied by a rise of 225 basis points in the United States. We are approaching an area of ​​high financial risk. The current data suggests that central banks will face global inflation by increasing their interest rates soon. In this circumstance, any internal weakness will leave our currency extremely vulnerable. We have, then, to anticipate with increases in our benchmark rate on the way to reaching 7% during 2022 from 4.5% today. The US could move from 0.50 to 3% in the same period, it is 250 basis points, which advances the pressure that monetary policy will have to stabilize prices, protect the peso by altering the growth objectives of the rest of the economy as little as possible. it already shows signs of weakening.

Doctor in Economic Development and Law

AUTHENTICITY

Professor at the Universidad Panamericana, Ibero and TEC de Monterrey. He has worked at the Bank of Mexico, the Ministry of Finance, in Washington, DC and in the Presidency of the Republic. He is currently studying for a doctorate in Philosophy with research in the field of ethics and economics. Author of books on economic history, financial regulation and public policy.