Mexico’s central bank may face slowdown

Bloomberg

Mexico’s central bank should be prepared for a slowdown in its economy while growth in the U.S. accelerates, with potential implications to the path of benchmark interest rates in the coming months, the newest member of the central bank board Alejandro Diaz de Leon said.
A series of rate increases by the central bank in the past year have helped manage the rapid decline of the peso and provide a cushion for the country to adjust “to shocks,” such as an increase in prices, Deputy Governor Diaz de Leon told Bloomberg.
Banco de Mexico has taken a tough stance on inflation, hiking rates a total of seven times since December 2015, which led to borrowing costs more than doubling to 6.25 percent. The increases continued into this year, even after economists slashed growth forecasts to the lowest level since 2013, and after Diaz de Leon joined the board.
In addition to being alert to inflation,”we need to also be mindful that probably the U.S. economy is going to accelerate its GDP growth and the contrary is expected for the Mexican economy,” Diaz de Leon said, calling them “different business cycles.”
The newest central banker is considered by some economists to be among the most dovish on the five-member board and according to a Bloomberg survey the most likely to replace departing Governor Agustin Carstens when he steps down this year to head the Bank of International Settlements. Prior to joining the bank in January, Diaz de Leon spent 10 years in government in positions including the Finance Ministry’s head of public debt, where he helped open Mexico’s bond sales to new markets, such as issuing the world’s first-ever 100-year security denominated in euros.
The central bank faces some of the toughest economic conditions since a 2009 recession, including inflation that is expected to climb to levels not reached since that year, a weaker currency and threats of a credit rating downgrade. President Donald Trump’s pledge to rework or scrap a free trade accord with Mexico is exacerbating some of those conditions as the nation ships close to 80 percent of its exports to the U.S.
The prospect of further volatility in the peso likely contributed to a decision by Carstens to
postpone his departure from the the central bank until November, instead of July as originally announced, according to a Banxico official with direct knowledge of the situation.
Once the future of U.S.-Mexico relations is clarified, both price formation and the peso will reach a level “according to the outcome” of the negotiations between the two countries, Diaz de Leon said. For now, the central bank doesn’t see the need for further contingency measures to bring order to the market, but it has a robust toolbox if needed in the future, he said.
The annual inflation rate surged by the most in 21 years in January after Mexico raised gasoline prices by up to 20 percent as it pulled fuel subsidies that were weighing on government finances. Inflation reached 4.72 percent, well above the central bank’s 3 percent target, and is expected to end the year at 5.32 percent, according to the latest Citibanamex survey.
The recent rise in prices from fuel cost increases represents a “significant challenge,” Diaz de Leon said. “It’s very important that mid-term inflation expectations and the process of price formation aren’t contaminated by these changes in relative prices that have come from adjustments in the exchange rate and gasoline prices.”
Economists in the Citibanamex survey also trimmed their forecasts for gross domestic product growth to just 1.5 percent for this year, whereas the central bank’s official forecast set back in November is for growth of 1.5 percent to 2.5 percent.