The Fed’s QE3 will have varying effects by country in LatAm; however, there are a few broad strokes that color the region. QE3 comes at a moment when growth is weak across the board and policy action is widely needed. What QE3 signifies for LatAm, in this context, is not only related to the added […]
Mexico’s Monetary Policy Inflation Dynamics (% y/y)
Source: Banxico and RGE
The cental bank of Mexico (Banxico) stayed on hold at its April meeting—leaving the monetary policy rate at 4.5%, as expected. Banxico’s communiqué highlights the multispeed recovery throughout the globe (with emerging markets growing stronger than developed markets).
Mexico’s Core CPI Dynamics (y/y, 2w/2w index)
Source: Banxico and RGE
Mexico’s central bank (Banxico) kept its benchmark rate unchanged at 4.5% at its March 4 meeting, in line with market consensus, including RGE’s expectations. In its communiqué, Banxico said that economic activity in advanced economies is now being driven by external demand and domestic consumption. With regards to global prices, the bank mentioned that numerous factors including high levels of liquidity, adverse weather conditions and the geopolitical conflicts in parts of the MENA region were driving costs upward and represent risks to the global economic recovery. In many emerging economies in particular, the rise in raw materials prices has increased the risk of inflation.
Mexican Inflation (y/y) and Monetary Policy Rate Source: Banxico and RGE
According to the new CPI index, Mexico’s inflation numbers surprised on the downside as headline inflation increased by 0.17% m/m (consensus, 0.27% 2w/2w; RGE, 0.28% 2w/2w) and core inflation grew by 0.21% 2w/2w (consensus, 0.29% 2w/2w; RGE, 0.27% 2w/2w). On a y/y basis, headline inflation dropped to 3.96% y/y from 4.4% y/y by the end of 2010 and core prices eased to 3.32% y/y from 3.58% y/y. Three factors were responsible for the result: 1) the inflationary impact in early 2010 associated with the fiscal adjustment has started to fade; 2) increases in local government tax have been much lower than in the past; 3) favorable weather conditions improved the supply of agriculture products. In RGE’s view, the latest data suggest a broad base deceleration in inflation which might continue throughout Q1 2011—getting closer to the target (3%) by March—but move higher in Q2 2011.
According to Citigroup’s Banamex survey, released on January 20, headline and core inflation expectations for Mexico have deteriorated for 2011 compared with the January 5 release. Higher inflation expectations come in a scenario where analysts continue to revise GDP growth expectations upward for this year, assuming the central bank (Banxico) will not hike rates during 2011. This stronger growth cycle and relative lack of intervention risks are translating into a stronger currency, as analysts see some appreciation pressures for this year. Growth and monetary policy expectations for 2012 have remain unchanged since December’s survey, with analysts expecting slower growth than in 2011 and rate hikes totaling 100 basis points (bps). Headline inflation expectations for 2012 rose by five bps but remain lower than 2011, while the appreciation bias of the currency remains in place.
Mexico’s central bank (Banxico) Governor Agustin Carstens said that the Bank could cut rates or increase selling of U.S. dollar options (Banxico’s FX intervention mechanism), should massive short-term capital inflows derive from the U.S. Fed’s quantitative easing, announced on November 3. Carstens also said that at the moment, the Mexican peso (MXN) is not overvalued. Although in the past, the stance of Mexican authorities did not show particular concerns about excessive currency appreciation, this verbal intervention by Carstens shows the same potential risks to the MXN as to the rest of Latin American currencies. The MXN has appreciated 5% year-to-date, a relatively small amount when compared with other Latin American currencies, aided by a monthly US$600 million option sale program by Banxico in order to accumulate reserves, a negative output gap, flat monetary policy rate, and security concerns.
On September 10, Mexico’s government reported that gross fixed investment declined by 2.1% m/m SA in June, after expanding 0.8% m/m SA in May, pushing the Q2 2010 performance to a contraction of 2.1% q/q SAAR, after expanding by 6.8% q/q SAAR in Q1 2010. On a year-over-year basis, investment grew slightly by 0.6% y/y, indicating a poor recovery, advancing 0.7% y/y in H1 2010, after collapsing 10.5% y/y in H1 2009.
Investors will focus on IMEFs manufacturing and non-manufacturing indexes for August to size up business confidence and future growth prospects. Moreover, the central banks August survey on economic indicators will be closely monitored: Further improvements to the inflation outlook might take place, downward revision on GDP growth is likely and expectations of flat monetary policy rates for a longer than previously expected period might consolidate. Finally, the central bank will report on lending conditions by commercial banks to the private sector.
The central bank increased reserve requirements (RR) on bank time deposits by BRL 34 billions, to be effective on April 9, and on additional requirements on time deposits and on demand deposits by BRL 37 billions, to be effective on March 22. The actions will withdraw a total BRL 71 billion in liquidity from the system. The RRs were lowered by Q4 2008 in order to provide liquidity to the financial system (BRL 100 billion) during the crisis; however, the central bank considers that the financial system is very liquid and that those measures are no longer necessary.