Last Wednesday the “Package against inflation and shortages” (Pacic) was presented, focused on the agreement, for six months, to contain the increase in the prices of a basket of 24 goods seasoned with other elements worthy of an illusionist and that they do not reduce the rate at which prices generally increase in the economy, such as combating insecurity on the highways, increasing national production of rice, beans, and corn in the short term, and speeding up customs procedures.
As can be seen, it is not really a macroeconomic stabilization plan, it is not an anti-inflationary plan; it is just a package of measures to give the impression that given the increase in inflation over the last year, particularly in the area of food and non-alcoholic beverages, the government is “doing something” for consumers, that it is not being crossing his arms, but that he is trying to avoid that during the next six months a few prices do not increase. Questions to the air: why are the carrots, but not the peas and potatoes?, why the saladet tomato, but not the ball tomato?, why the jalapeño pepper, but not the serrano pepper?, why Why white box bread, but not bolillo and telera? Why white chicken eggs, but not red? Why is the reduction in tariffs on 21 consumer goods and five strategic inputs only for six months and not permanently? Mysteries of the fourteen.
There is an additional point that is worth commenting on, and it is regarding the presidential “request” to the Bank of Mexico not to increase the interest rate, since it said: “the less interest rates rise, the better for there to be investment.” Four comments.
First, any successful stabilization plan that manages to reduce the inflation rate is based on a restrictive monetary policy that necessarily implies an increase in the interest rate at which the central bank offers financing to the banking system, that is, the interest rate. overnight funding (at the current level of 6.5%, monetary policy is not really restrictive, but rather accommodative). By increasing this rate, what is sought is that short-term interest rates in the financial market also increase, seeking to discourage consumption (mainly that of durable consumer goods that are traditionally acquired on credit).
Second is the possible negative impact on investment of an increase in interest rates. Even if it could happen, the evidence suggests that it would be marginal, especially when considering that what is sought is to gradually reduce inflation from its current level of a little more than 7% to the target of 3 percent. Given that current inflation is not so high that it would require a shock adjustment that would send the economy into a deep and long recession, gradual and not large increases in the overnight funding rate would not greatly affect the investment projects that by their nature have a long-term horizon.
Third, given the current level of inflation, if the Bank of Mexico does not increase the interest rate now, inflation expectations would remain high, which would have two negative effects. First, market interest rates for all terms would continue to be high, raising the real cost of stabilization. Second, the trajectory towards the 3% inflation target would be slower.
Fourth, the president does not accept that what has discouraged investment in the country, thereby reducing the potential for economic growth, has been his decision to violate the rule of law, to arbitrarily change the rules of the game and negatively affect legal guarantees. Investment will not pick up even if the Bank of Mexico erroneously paid attention to it and did not increase the interest rate; If private investment remains stagnant, don’t blame the central bank because someone else is to blame.
Twitter: @econoclasta
Economist and professor
Point of view
Knight of the National Order of Merit of the French Republic. Medal of Professional Merit, Ex-ITAM.