High inflation and rate hike in the US – El Financiero

Recent inflationary pressures, in addition to the normalization of monetary policy in the United States by the Federal Reserve (Fed) will be the two great challenges that the Bank of Mexico (Banxico) next year, indicated Alejandro Díaz de León, governor of the institution.

During his participation in the XLIX IMEF National Convention, he pointed out that these two factors are on the radar of the monetary authority, and will be the next challenges to overcome during 2022.

“There are two major challenges, the first is inflationary and the second, which may be coincidental or with a certain time lag, is the normalization of the monetary policy stance in the United States. There is no doubt that the most complex thing would be to confront both with intensity and simultaneously, ”said the official.


He warned that, if these two factors occurred at the same time, “it would not only generate an adjustment in the terms and conditions of financing at a global level, but would probably generate an aversion to risk and even a rearrangement of investment portfolios and probably capital outflows from economies. emerging ”.

Díaz de León said that advanced economies could be expected to gradually correct the course of fiscal and monetary policy.

“That gradualness can be done by conditions very different from ours; They have been with inflation consistently below their goal for more than 20 years and with the problem of creating and promoting increases in inflation to bring them closer to their goal, otherwise in emerging economies, where it has been difficult for us to lower inflation to our goal. and to root it at that level, that means that they are proving to be more patient to increase interest rates this time, “he said.

FIRST, focus on INFLATION


The central banker said that they should first focus on the inflationary issue, since recently in the same forum the deputy governor of Banxico, Jonathan Heath, said that for November and December it is very likely that the price level exceeds 7 percent, well above the central bank’s target range of 3 percent with one percentage point difference.

“What is the challenge for an economy like the Mexican one? First we have to face the challenge that we have to face right now, which is a significant increase in inflation; Although inflation is external, and we are not going to undo external inflation with instruments of internal monetary policy, but what we can do is avoid generating pollution in price formation and generating the so-called second-round effects, where the prices that do not have affected the costs of their inputs review prices simply and simply because there is an environment of revision to the rise of prices ”, he added.

In this context, he pointed out that what Banxico has sought is to strengthen the monetary policy stance to manage with the greatest possible order that the economy and the markets assimilate the shock, since they will evaluate when the Fed begins the restrictive cycle of rates in the United States .

“We believe that the greatest option that public policy has is when it tackles the problems it faces when it has them, and if later on it is going to be more complex or more challenging, because maybe in a year or eight months the Fed will begin to raising rates and Banxico did it in advance, that will be a problem that will have to be evaluated in due time and circumstance ”, said the governor of Banxico.

TO THE EXPECTATION OF THE FED

He considered that anticipating the Fed with adjustments in the reference rate gives them greater room for maneuver.

“We should not seek not to make necessary decisions today, because they could probably become more necessary tomorrow. I believe that this is a policy that implies taking risks, and, in any case, if the interest rate differential, which has currently been increasing due to monetary policy actions in the short part and by risk premiums in the short part long, eventually it can also give Banxico more room for maneuver so that it does not necessarily have to replicate what the Federal Reserve does, ”he emphasized.

Currently, Banxico has increased the reference interest rate on four consecutive occasions with the same magnitude (25 basis points each time), which currently stands at 5 percent, and the consensus of private sector analysts estimate that the benchmark it could close this year at 5.25 percent, which would imply a new rise in the last monetary policy decision to be held on December 16.

In addition, the most recent expectations suggest that the funding rate will rise to 6.0 percent at the end of 2022, which implies about three upward adjustments of 25 points over the course of the year.

For the federal funds rate in the United States, it is expected that the Fed will be more patient and that it will start the cycle of increase until next year or at the beginning of 2023, despite the inflationary pressures registered.

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