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Why Mexico does not have to follow the Fed step by step

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Mexico’s central bank won’t necessarily raise interest rates at the same time as the US Federal Reserve throughout its northern neighbor’s entire monetary tightening cycle, according to Gerardo Esquivel, the bank’s deputy governor.

The bank, known as Banxico, has traditionally tended to match Fed hikes to avoid destabilizing capital flows that could have an impact on the peso. Last week, it followed the Fed in its half percentage point rate hike, taking its key rate to 7%, up from 4% when it began hikes in June.

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We may move in lockstep with the Fed for a while, as we have in the last two decisions, for example, but that’s not necessarily going to happen in the future for a reason: We started before the FedEsquivel told Bloomberg News in an interview on Monday, noting that Mexico is closer than the United States to its neutral rate, the level that neither speeds up nor slows down the economy.

“The Fed is facing a very tight labor market, but that is not the situation in Mexico”, he added. “In the United States, they face excess demand in certain markets; that is not the case in Mexico.”

When one of Banxico’s five board members voted in favor of a 75 basis point increase last week, the bank signaled that it might assess “stronger measures” if necessary to meet its 3% inflation target, plus or minus one percentage point. Inflation reached 7.68% in April, its highest level since January 2001.

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The forward guidance was an effort to anchor inflation expectations by stating that if prices do not move as expected, “we’ll be open and willing to move a little fasterEsquivel said. “That doesn’t necessarily mean it’s going to happen, that just means it’s up for discussion.”

Esquivel, 56, has consistently been the most dovish member of the board, dissenting from the majority during all but the last two decisions in the current cycle. If the board were to vote for a 75 basis point increase, it would be the biggest since the bank adopted an overnight rate to target inflation in 2008.

The former economics professor said that he supports President Andrés Manuel López Obrador’s effort to deal with inflation through a price pact with the main companies on the most popular goods in the Mexican basket, which are mainly food that constitutes the largest part of the spending of the poorest Mexicans.

The slowdown in food price rises “could help mitigate not only the complications of these inflationary pressures, but also mitigate future wage demands, wage increases”, which have a significant impact on inflation, indicated Esquivel. It would “more than happy” if the plan reduced 100 basis points of inflation, he added.

Source: Gestion

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