There are no clear signs of an economic slowdown and the lower slack allows us to assume a more restrictive monetary stance”.
Minutes Bank of Mexico
The appropriate pace of rate adjustment and the time they must remain in restrictive territory are issues discussed by the members of the Bank of Mexico’s Governing Board at the August meeting.
A member of the board warned that in order to guarantee the convergence of inflation to the target, additional adjustments to the rise in the rate will be required, the magnitude of which must be assessed according to the information available.
In the aforementioned meeting, when they unanimously decided to raise the interest rate by 75 basis points to take it to 8.50%, another member stressed that they must “decipher” the appropriate rate of adjustment and must also define the time that monetary policy will remain on the ground. restrictive.
According to this same member, the challenge for monetary policy is greater when assuming the economic environment, geopolitical conflicts, as well as the uncertainty about the reestablishment of supply chains and the future trajectory of inflation at a global level.
It could be the start of a period of high interest rates and economic weakness, he warned.
The other member who believes that there are already internal pressures on inflation stressed that “there are no clear signs of an economic slowdown and that the lesser slack makes it possible to assume a more restrictive monetary stance.”
He considered that the situation of the economy allows the cycle of rate hikes to continue to consolidate a restrictive stance that will allow inflation to be contained in the short term.
High price
Another member warned that “excessive tightening (of the rate) could imply a high cost in terms of employment, purchasing power and economic activity and even be counterproductive for macroeconomic and financial stability.”
A third member commented that a “careful assessment of the available space is required so that the next decisions are consistent with the convergence of inflation towards the target, with an orderly adjustment of the economy and with the financial markets, prioritizing the preservation of credibility of the central bank”.
And another one pointed out that the adjustments in the rate will not eliminate global pressures but they will help to avoid second-order effects, since he recognized that there are also internal pressures.
He believed that a guide on the rate will explicitly communicate if the conditions exist to determine if the rate increase rate is maintained or if some space is taken advantage of to alleviate said rate.
Trust and Credibility
Three members argued about the importance of preserving the central bank’s credibility and commitment to meeting the inflation target.
One of them argued that firm and forceful actions will help “restore confidence in the central bank’s commitment to the convergence of inflation to the target.”
Another member argued that given the complexity of the environment and high uncertainty, “it is the responsibility of the central bank to take the necessary measures to comply with its constitutional mandate.”
When detailing “the complexity of the environment,” he referred to more stringent global financial conditions (less availability of liquidity), uncertainty and the nature of the shocks that have raised inflation.
The Fed and the spread
A member of the Board literally said that “an increase less than that of the Federal Reserve is not feasible because the rate differential of 600 base points with respect to the United States has been enough to promote a good performance of the Mexican peso in the face of episodes of volatility and the general appreciation of the dollar.
“Maintaining the relative position would help avoid episodes of exchange rate volatility,” he said.
And another member, who recommended a “moderate tightening”, indicated that avoiding an excessively restrictive monetary policy would imply the possibility of detaching relatively soon from the rate of rises of the Federal Reserve.
A couple of board members stressed the importance of communication with the market.
One of them emphasized that the statement should allow the market to anticipate more restrictive future monetary conditions. He specified that given the high uncertainty that prevails in the economic environment, said guide must guarantee flexibility and reiterate that Banco de México will act with the necessary forcefulness.
Another member was of the opinion that a guide on the path of the rate is essential, “to explicitly communicate that the upward cycle is not yet over, to emphasize that the necessary forceful action will be taken.”
