Mexico: Carsten tightens – and leaves
On 15 December, Mexico’s central bank (Banco Central de México, Banxico) raised its benchmark interest rate by 50 basis points (bps) to 5.75%, double the 25bps increase expected. The Banxico move came after a 25bps rise in US Prime rate, announced by the Federal Reserve a day earlier, and after news that the long-serving Banxico head, Augustín Carstens, will step down in July 2017 to move to a new role at the helm of the Bank for International Settlements (BIS).
Everything points to a change of era in Mexican monetary policy. The election of Donald Trump as the new US president has raised uncertainty and increased speculative pressure on the Mexican peso, as investors calculate that the country could be badly affected by shifting US trade and immigration policies. Meanwhile, within the US, Trump’s plans for increased spending and infrastructure investment point to a higher US fiscal deficit and tighter monetary policies. In Mexico, there is concern at Carstens’ departure. Alonso Cervera, chief Latin American economist at Credit Suisse, said that while the move to the BIS was an upgrade for Carstens, “from Mexico’s perspective it is a clear loss, given that he has always been seen as a strong anchor for Mexico’s macroeconomic policies”. Journalist Raymundo Riva Palacio said that Carstens’ departure “adds bad omens to the last third of [President Enrique] Peña Nieto’s presidency”, which ends in 2018.
While it awaits news of a successor, Banxico seems to be committed to staying a step ahead of the Fed’s tightening curve. The bank cited two reasons for its latest 50 bps increase. One was to contain ‘second round’ inflationary effects from peso depreciation. While inflation remains low (at 3.3% in the year to November), it is expected to break above Banxico’s 2%-4% target range at some point in the next six months. The second reason was the need to “remain vigilant” on the “relative monetary policy positions” of Mexico and the US. Most analysts therefore expect more tightening during 2017. Neil Shearing of the London-based Capital Economics predicts that Mexico’s benchmark rate will rise by a further 100bp to 6.75% by the end of 2017.