The beginning of an upward cycle in US interest rates in 2023 may inhibit investment projects and even the taking of loans in emerging countries such as Mexico.
Life is full of surprises and in the financial world this phrase is no exception. The United States Federal Reserve (Fed) surprised the world last week by saying that it will start the upward cycle of its interest rate in 2023 by up to 50 basis points.
The world’s most powerful central bank argued for a better health situation, so the change in monetary policy will take place a year earlier than expected. Currently the interest rate is between 0% and 0.25%.
What does this announcement imply for Mexico? How will it affect people’s pockets?
“The (stock) markets fell, the dollar strengthened, the currencies of emerging economies depreciated. There was some volatility, there was some nervousness and this may affect inflation expectations and, to a certain extent, the expectations of economic activity as a whole,” said Jessica Roldán, director of economic analysis at Finamex Casa de Bolsa.
In addition to the appreciation of the dollar against emerging currencies, such as the peso, the announcement by the Federal Reserve makes long-term Treasury bonds more attractive, thus producing a portfolio effect. “When the market begins to anticipate that a rate hike could come earlier than expected, long-term bonds begin to be more attractive and there is a recomposition of the portfolio of emerging markets such as the peso, in the case of Mexico. Then, he leaves the country and enters the United States,” explained Jesús Garza, professor at the EGADE Business School of the Tecnológico de Monterrey.
The Mexican peso closed last week with a depreciation of 3.56% (70.7 cents), to reach 20.58 units per US dollar.
Gabriela Siller, director of economic-financial analysis at Banco Base, commented that although the strengthening of the greenback began before the Fed’s announcement (on June 16), the fact that the central bank adopted a less flexible stance gave a boost to the coin.
“If people start to expect that interest rates are going to rise earlier than expected, it can inhibit some investment projects or it could also inhibit the taking of loans from companies or consumers,” said Roldán Peña. “The market probably expected only one hike in 2023 and they announced two,” he added.
The Fed rate is a reference in the world, so the direction in which it moves tends to dictate the direction that other economies take, especially emerging ones, including Mexico.
Although the Governing Board of the Bank of Mexico (Banxico) is not expected to raise the benchmark interest rate at the June 24 meeting, there are voices that suggest that the central bank should start an upward cycle soon, as they have made countries like Brazil, Turkey and Russia.
“I am one of those who think that the inflationary issue in Mexico is not transitory and that the Bank of Mexico should act. There are several factors: one is that several countries are already facing the shock of commodities on their inflation. Second, after a 6.1% inflation peak in April, the May figure was 5.89%, which indicates a slowdown in the rate of price growth. However, subjacent inflation did not, which grew from 4.3% in April to 4.37% in May”, Garza, from EGADE, warned.
The Fed, unlike Banco de México, has a dual mandate, that is, in addition to keeping inflation under control, the US central bank aims to achieve full employment.
“Taking abrupt measures is not the style of Banco de México and they are not advisable, we must adopt a prudent approach,” said Jessica Roldán.
Last Friday, St. Louis Federal Reserve Chairman James Bullard declared that the Fed’s tightening of monetary policy is a “natural” response to economic growth and, particularly, faster-moving inflation. than expected.
In an interview with CNBC, Bullard said he was among seven Fed members who expect more aggressive measures, with rate hikes starting next year, to contain inflation that is believed to be more persistent than their estimates estimate. colleagues.
“I estimate that we will start (raising the interest rate) at the end of 2022,” Bullard said, according to Reuters.
Speculation about the future of the Fed’s monetary policy caused markets to close negatively. In the United States, the Dow Jones index registered a weekly loss of 3.45%, said Siller, of Banco Base.
In Mexico, the Mexican Stock Exchange had a weekly loss of 2%, to close at 50,261.68 points.
Fed Chairman Jerome Powell has pledged to be more transparent in the central bank’s decision-making in the coming months.