Raising rates… Calming the economy?
Raising prices is the monetary policy tool that nations have, either to defend the exchange rate, to cool the economy, or to stem the inflation spiral.
To be sure, the decision of the Bank of Mexico’s Board of Governors to raise the benchmark interest rate by a quarter point is technically correct. In his tweets, one of the governor’s representatives, Jonathan Heath, explained many of the reasons why he did so. Some would say that the main reason may have been the latest inflation data, both complete and implied.
Some additional reasons may be the markets’ perception, that the North American Fed will raise its rates earlier than expected, i.e. during 2023 rather than at the end of that year or even at the beginning of 2024. After announcing in this sense, the rate of increase US long-term bonds last week slightly before regaining the level it was before.
The Governing Council of Mexico may have thought or also knew that the exchange rate began to move a little bit for various reasons, mostly external, but some of an internal nature as well, and considered that before risking what matters most to the President of the Republic it was best to be careful.
Since there are three board members appointed by López Obrador who are sensitive to his views, one hopes AMLO will receive this decision, if not consulted, at least. Undoubtedly the current Secretary of the Treasury, or the next Secretary of the Treasury, explained the reasons for this decision by Banxico, and he understood them perfectly. But, I suppose they also explained to him that this decision in itself, and especially if it became a trend, could complicate life for the government.
In fact, starting to raise interest rates – Brazil’s central bank already did it a few days ago – and anticipating what is happening in the US, may have a slowing effect on the economic recovery. It can also, of course, almost certainly affect other interest rates in Mexico: mortgages, cars, and credit cards, for example. At some point, raising interest rates can become a real burden on the economy. There will be nothing strange or bad about this. Moreover, one of the reasons the Federal Reserve made the announcement it made was specifically to try to stop the debate about whether the US economy is overheating. The Fed does not think it is still cautious but nonetheless prefers to be cautious.
Raising prices is the monetary policy tool that nations have, either to defend the exchange rate, to cool the economy, or to stem the inflation spiral. Doing so today in Mexico was correct; But the consequences of this decision will not be avoided, he insisted above all, if it becomes a trend. And even in one of these it turned out that Lopez Obrador did not like the idea very much and then began to discuss with the Bank of Mexico, despite the fact that by the end of the year, four of the five members will be his concern. .
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