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Leadership change will test the Mexican central bank amid rising inflation

The surprising turn of the helm by the Mexican president Andrés Manuel López Obrador in the nomination process for the next president of Bank of Mexico (Banxico) has cast doubt on the bank’s rate-tightening cycle as it struggles to keep high inflation under control.

López Obrador, a leftist politician who has already placed three of the five members of Banxico’s board of directors, ruled out the candidacy of former Finance Secretary Arturo Herrera. Instead, he proposed a relatively unknown official at that firm, Victoria Rodríguez, as the first woman to run the bank.

The news hit the Mexican peso, which lost as much as 2% to 21.6070 per dollar on Wednesday, its weakest level since March 8, before cutting some of its losses.

Some analysts said that the measure puts the independence of the monetary entity under scrutiny, despite López Obrador’s promises that there would be no interference or interference from the government in its decisions.

“The uncertainty created by this development is also very untimely given that the central bank is struggling to control inflation and amid drifting inflation expectations,” said Goldman Sachs economist Alberto Ramos.

Annual inflation increased more than expected in the first half of November, slightly above 7%, the highest rate in more than two decades and more than double Banxico’s inflation target of 3% +/- one point percentage.

Banxico’s Governing Board raised its benchmark interest rate by 25 basis points on November 11 for the fourth consecutive monetary policy decision, bringing it to 5%.

Rodríguez will replace outgoing governor Alejandro Díaz de León, whose term will expire at the end of 2021. His nomination must be ratified by the Mexican Senate, which should be a formality due to the comfortable majority of the government.

Some analysts anticipate that Rodríguez would tip Banxico in a more moderate direction.

“The five-member board will remain autonomous, only more moderate. We must bear in mind that most emerging markets and especially advanced economies already have moderate central banks waiting for many inflationary shocks to fade, ”said Joan Domene, senior economist at Oxford Economics.

Still, given the extraordinary inflationary challenges, the central bank is likely to continue raising rates.

“We doubt that this appointment will alter the monetary policy landscape,” said Nikhil Sanghani, Latin America economist at Capital Economics.

Sanghani predicted that Banxico’s tightening cycle will remain gradual with four more rate hikes from 25 basis points to 6% by mid-2022.

“The key risk to our opinion is if the peso comes under greater pressure, as that may result in a more aggressive adjustment, even under a more moderate board next year,” Sanghani said.


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