Is the Bank of Mexico a copy of the Fed?

2022 is, among other things, the year that central banks pulled out the whip to try to put inflation back in the cage. We started this year with the Banxico interest rate at 5.5% and the Federal Reserve at 0 percent. We will close it at levels of 10.5% and 4.5% respectively.

In these 12 months we went from having rates that offered negative returns to a peculiar situation: Mexico has the highest real rates among the relatively developed emerging countries, while the United States Fed continues to offer negative real rates, but receives criticism for the high cost of money.

Seriously and jokingly, Banco de México is accused of “copying” the Fed. The day before, in Washington, an increase of 0.50% was decided, the same was done here, 24 hours later. This was the case with the four increases of 0.75 in the second semester. First the Federal Reserve did it and then the Bank of Mexico. The fact is that the rate gap between Mexico and the United States has remained at six percentage points. It is more than enough to maintain the muscles of the Super Weight.

Is Banxico a copy of the Federal Reserve? This is a half truth, despite what the memes say. The statement is only valid for 2022 and from March onwards. The Mexican central bank began raising interest rates in June 2021, nine months before the Federal Reserve. In mid-2021, the governor of Banxico was Alejandro Díaz de León and the decision to raise rates had nothing to do with the international environment. The consumer price index was at 5.88%, well above the central bank’s 3% target. The increases in the prices of tomato, lemon and domestic gas stood out.

The increases continued with the arrival of Victoria Rodríguez Ceja to Banco de México. They move to the rhythm that the Fed plays, as do many central banks in the world. For example, what happened yesterday, December 15. In addition to Banxico, five other banks raised their rates by half a percentage point: England, Switzerland, Denmark, Hong Kong and the European Central Bank.

How effective are increases in central bank reference rates in combating inflation? In the economic debate, this is one of the questions that has been raised the most times throughout 2022, a year in which almost all the world’s central banks have made significant increases in their rates. The doubt is valid because high inflation has been fueled by various non-monetary factors: Russia’s invasion of Ukraine; semiconductor shortages; draconian lockdowns in China; excessive public spending to lift the economies devastated by the covid; oligopolistic structure of some markets, such as medicines, and poor harvests related to climate change.

The higher levels of inflation in Europe, the United States and Latin America appear to be behind us, in most countries, but it is not clear that the decline was a consequence of the actions of central banks. International prices for oil and basic grains reached highs in the middle of the year, after the supply of oil, fertilizers and wheat collapsed with Russia’s attack on Ukraine. Little by little, the markets “normalized” and prices began to fall.

Inflation has already been falling for two months and the central banks have contributed to that decline, although it is very difficult to establish how much is due to them and how much to other factors. In some countries, like Turkey, we can see what happens when the monetary authority does not do its job properly. There, inflation is at 85.5 and the Turkish lira has devalued 29% in 2022, in addition to 44% in 2021. The Central Bank of Turkey has a reference rate of 10.5% and seeks to continue lowering that number. The head of state, Tayyip Erdogan controls the bank and believes that lowering rates reduces inflation.

How much longer will interest rate hikes continue? Experts project that in the United States there is still one more quarter, at least. Two 0.25% increases and then a pause at the highs, before starting to drop. Will Banxico continue dancing to the tune played by the Fed? Most likely, yes. In these times, getting creative in monetary policy can be very expensive.

lmgonzalez@eleconomista.com.mx