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Mexico: Tightening will not have serious consequences on the economy - Wells Fargo

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Feb 18, 2016.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

    Oct 7, 2015
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    According to Eugenio J. Alemán, Senior Economist at Wells Fargo, the decision of the Bank of Mexico to raise rates by 50bps yesterday was a surprise and so far it will not affect the economy, unless the central bank continues with its campaign.

    Key Quotes:

    “The Mexican central bank surprised markets yesterday by implementing a 50 bps increase on its benchmark interest rate, from 3.25 percent to 3.75 percent, saying that it was concerned that inflation expectations could de-anchor due to the strong depreciation of the Mexican peso over the past year and a half.”

    “What surprised the markets even more probably was not the increase in the rate itself but rather that the increase was 50 bps rather than just 25 bps.”

    “According to the central bank’s communique, the move was not intended to reflect a “tightening” of monetary policy but just a complementary measure to help the Mexican government at a time when fiscal tightening due to the collapse in oil prices was putting pressure on the economy. Of course, the communique makes little sense because you could argue that a 25 bps move was probably more in tune with a “signaling” process by which the central bank tells markets that it is on top of the situation. However, a 50 bps move looks more like a tightening of monetary policy than a 25 bps move.”

    “We do not believe that this move will have serious consequences for Mexican economic activity or at least more serious than the strong tightening fiscal policy is already having due to the collapse of the price of petroleum. The central bank’s only concern is inflation and thus it knows that at some point in time the strong depreciation of the peso will start affecting expectations and thus the rate of inflation.”

    “Furthermore, we already have a weaker Mexican economy in our forecast for 2016 so for now the recent tightening will not affect our view on the economy. However, if the central bank continues with its campaign, the economy will start feeling the effects.”
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