The Impact of Diverging Central Bank Policies on the Mexican Peso

by worldysnews

Central Banks Maintain Interest Rates Amidst Different Perspectives

© Reuters. By Julio Sanchez Onofre

In recent monetary policy decisions, both the Federal Reserve (Fed) and the Bank of Mexico (Banxico) have chosen to keep their reference rates unchanged, at 5.25% and 11.25% respectively. This decision maintains a spread of 600 basis points (bp) between the two.

Fed’s Pause for Analysis

The Fed’s decision allows them to carefully analyze incoming data before determining the number of future rate hikes. According to Jerome Powell, the Fed’s president, it is likely that there will be two more 25 bp increases throughout the year, keeping rates at elevated levels.

Banxico Observes Effects of Restrictive Monetary Policy

Banxico, on the other hand, is closely monitoring the impact of its restrictive monetary policy on the real economy. The decline in inflation has been more significant than expected, which has prompted discussions about potential rate cuts.

Expectations for Rate Cuts

Based on current projections, many analysts anticipate that Banxico will begin lowering rates in the last quarter of the year. However, some experts even expect rate cuts as early as September.

Peso’s Performance and Exchange Rate Impact

Throughout this year, the Mexican peso has already appreciated by approximately 12% against the dollar. The attractive rate differential has contributed to this performance, leading to a historical trend not seen in 15 years.

“The peso is set to close June with six consecutive months of gaining ground against the dollar, a feat not achieved since December 2007 to July 2008,” said Gabriela Siller Pagaza, director of Economic and Financial Analysis at Base Bank.

However, if Banxico cuts rates before the Fed, it could lead to a depreciation of the peso and bring it closer to 18.00 units against the dollar, according to Citibanamex analysts.

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These exchange rate movements occur in the context of a weakening US dollar. Citi analysts maintain a bearish outlook for the currency, citing concerns about a possible recession and a potential outperformance of the Rest of the World (RoW) against the United States.

Furthermore, there has been a trend of asset reallocation away from the United States, which could have long-term pessimistic implications for the dollar.

“Despite the resilience of the peso amidst the global situation, if greater alerts regarding the closure of the economic cycle in the United States and a lower interest rate differential materialize, the Mexican peso could show less strength in the second half of the year,” warned Citibanamex.

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On the Mexican economy. The central bank has been raising interest rates to combat inflationary pressures but has paused its tightening cycle for the time being. Banxico will continue to assess economic conditions and make future decisions accordingly.

Overall, both central banks are taking a cautious approach to monetary policy. The Fed is closely watching economic data to determine future rate hikes, while Banxico is observing the effects of its previous rate increases. These decisions highlight the different perspectives and strategies of central banks in managing their respective economies.

How has the Mexican economy been affected by Banxico’s tightening cycle and the pause on interest rate increases?

Banxico’s tightening cycle refers to the period in which the Bank of Mexico (Banxico) implemented a series of interest rate increases to control inflation and stabilize the Mexican economy. The pause on interest rate increases, on the other hand, refers to the decision by Banxico to halt further rate hikes.

These actions have had several effects on the Mexican economy:

1. Inflation control: The tightening cycle was primarily aimed at controlling inflation, which had been a concern in Mexico. By raising interest rates, Banxico reduced the money supply, which in turn lowered inflationary pressures. This helped stabilize prices and restore confidence in the economy.

2. Exchange rates: Higher interest rates generally increase the attractiveness of a country’s currency, leading to capital inflows and appreciation. During the tightening cycle, the Mexican peso strengthened against major currencies, making imports cheaper and benefiting consumers. However, a pause on interest rate increases may reduce the attractiveness of the peso, potentially leading to depreciation and higher import costs.

3. Investment and borrowing costs: Higher interest rates can increase borrowing costs for businesses and consumers. This can reduce investment activity and slow down economic growth. The tightening cycle might have constrained borrowing, which could have affected businesses’ expansion plans and investment decisions. However, a pause on interest rate increases may provide some relief to borrowers, encouraging investment and consumption.

4. Economic growth: The impact of Banxico’s tightening cycle and the pause on interest rate increases on economic growth is more nuanced. While higher interest rates can dampen economic activity by reducing consumer and business spending, they also contribute to price stability and financial market confidence. The pause on interest rate increases, however, may provide some stimulus to promote economic growth, as borrowing costs moderate and investment activity picks up.

Overall, Banxico’s tightening cycle and the subsequent pause on interest rate increases have tried to strike a balance between inflation control and supporting economic growth. The long-term effects will depend on how effectively these measures are implemented and their impact on key indicators like inflation, exchange rates, investment, and economic growth.

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Louisa June 27, 2023 - 1:17 am

The Mexican Peso faces a challenging road ahead as it grapples with the impact of diverging central bank policies. Volatility and uncertainty loom as the currency’s value may be vulnerable to the changing global economic landscape.

Evie June 27, 2023 - 1:17 am

The diverging central bank policies on the Mexican peso have undoubtedly created a challenging situation. It is crucial for policymakers to closely monitor and assess the potential consequences to ensure stability in the currency market.


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