Inflation without yielding merits hike of 100 base points: expert

The economic and inflation conditions are set for the Bank of Mexico to be encouraged to raise the rate by 100 basis points (bp) during the November announcement, warned Marco Oviedo, an expert in monetary policy and global finance.

With core inflation rising more than 18 monthly readings and an economy in good shape, which has even reduced unemployment, board members can take advantage to speed up their rate hikes, he warned.

Oviedo maintained that to bring inflation to a punctual 3% as Banxico estimates in 2024, a terminal rate of 12 percent is required. If they do not agree to take the terminal rate to 12%, then they would have to change their inflation projections because they will not reach it if they rise from 75 to 75 basis points, he estimated.

His projection on the terminal rate was made by applying the so-called “Taylor rule”, which relates the nominal interest rate that the central bank must adopt with inflation, GDP expectations and other economic variables.

If they rise from 75 to 75 basis points, it will take almost five months to reach the terminal rate if they agree to take it up to 12 percent. But if they rise from 100 to 100 bp, in three months they would be there. And yes, it will make a difference to be squeezing as much as possible, he stressed.

Focus on inflation

From your perspective, the episode of inflation that we are experiencing is quite complicated. And if you were being cautious (in the Governing Board) due to the risk of an economic contraction, the data from the Global Index of Economic Activity (IGAE) for August and the upward revisions of the series, can confirm that you should focus on the inflation.

A more dynamic economy, as evidenced by the IGAE data, could be behind a stronger demand that is becoming an additional pressure for inflation.

If the economy were contracting or showing signs of a contraction, this same dynamic would help lower inflationary pressure and give Banxico room to decouple from the Fed. But this is not the case.

Banxico errs on the side of caution

Oviedo stressed that the Bank of Mexico missed the opportunity to be opportune and raise the rate by 100 points since the June decision, when the Fed accelerated the upward cycle by going from increases of 50 points to 75 points.

With this measure, the Fed was able to correct a little the error of its diagnosis on temporality and was a little ahead of the inflation curve. And that has not happened in Mexico because they are too cautious.

“Let’s look at the international context of Latin American peers. There are Brazil, Chile, Peru. Even Colombia, which has applied increases of 100 basis points or more because the situation warrants it and I believe that Banxico has already erred in being cautious.”

The strategist, whose analyzes have been decisive in decisions of global investment banks, recalled that at some point this year, Deputy Governor Jonathan Heath said that the Fed was a floor.

I have the impression that they now see it as a ceiling despite the fact that inflation in Mexico is not giving way. And it’s time to move on.

ymorales@eleconomista.com.mx