“Policy tightening” was the title of Carlos Capistrán’s analysis of the Mexican economy in 2016. The chief Mexico economist at Bank of America Merrill Lynch delivered his remarks in May at the Council of the Americas CFO Forum at the Club Industrial in Monterrey, Mexico.
Capistrán chose the headline based on the fact that monetary and fiscal policies have been toughened to stabilize the country, in light of shocks on the fiscal and external fronts. Capistrán qualified the moves as positive ones. “Countries tend to be slow in reacting to shocks. In Mexico, we are reacting right away,” he said.
Balancing Appreciation and Inflation
On monetary policy, the Bank of Mexico (Banxico) has allowed the exchange rate to serve asa buffer to external shocks. The sizeable depreciation of the peso has induced more local consumption, but additional demand has not led to higher inflation rates. Banxico recently announced its decision to intervene in the foreign exchange market in a discretionary manner to keep exchange rate volatility in check. Officials also said they will fundamentally rely on interest rates to control inflation expectations and let the peso float relatively freely.
Eventually, Capistrán said, the peso will appreciate and inflation will rise, or there will be a mix of the two effects. But for the time being, Mexico can benefit from higher consumption without domestic price rises. He added that he expects inflation to reach a moderate 3.3 percent …
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