Banxico prioritizes inflation control, criticizes expert

Mexico's monetary policy is too aggressive to combat inflation, and the rules followed by the Bank of Mexico (Banxico) to achieve this have negative impacts on the rest of the economy, basically on employment, said the expert from the Institute of Economic Research from UNAM, César Duarte Rivera.

“In many moments it seems that employment is being sacrificed in order to control prices, and I wonder what is worse: having to pay 10 percent more for your products or services, or losing your job. That would be the criticism that I would make of Mexican monetary policy,” he pointed out.

When the Bank of Mexico increases the interest rate, which is how they try to control prices, those corresponding to credit cards rise; mortgage, car or property loans, also for companies. “Then a company that needs a loan to open a new factory or to continue operating, has to pay more, and that decreases its production volumes, less is produced and that implies fewer workers; the whole economy is depressed”, he warned.

For Duarte Rivera, this economic depression is especially serious in the current context because it goes hand in hand with production and gross domestic product. The problem is deep down, because in the 1990s (with Carlos Salinas de Gortari) a constitutional reform was made to Banxico, and it was established that its objective was price stability. It is not the fault of the current directors of the Bank of Mexico, but by law their goal is to maintain stability and control inflation.

The problem is that before that modification, the work of the Bank of Mexico was economic development. Central banks have some ability to increase employment and improve production. "However, it has been decided to forget all that part and focus only on price control," he explained.

Duarte Rivera asserted that economists must see beyond monetary policy, which is not everything. There are other mechanisms to control inflation without considering, such as price controls and agreements with the sectors to keep them stable.

Inflation in this six-year term has increased, the university student added, because it does not depend on internal conditions of the Mexican economy. The main causes are external, due to the effect of the pandemic, the global production chains that continue to be stopped, and the scarcity of supplies.

“For example, to produce a car, one part comes from Taiwan, another from Brazil and another from Germany. And that even before the pandemic it worked well, with the health contingency it stopped, and those chains are barely recovering. That car that used to be produced quickly now takes longer, there are fewer cars on the market and, therefore, they are more expensive.

Added to this is Russia's war with Ukraine, which hinders trade channels in that region and caused the price of energy (due to the blockade in the region) to increase. “There are pressures from many sides to increase prices. The inflationary phenomenon that we are experiencing is not exclusive to Mexico, in fact the United States has higher rates than we do today. There is inflation in Europe and in practically the whole world, so despite the national measures it is not something that is in the control of the Mexican authorities, ”he specified.

According to Duarte Rivera, the rates of the Federal Reserve of the United States mark a guide so that those imposed in Mexico follow the same path.

“They also affect international investors, who are going to receive compensation for buying a bond (from the Treasury in the United States or from Cetes in Mexico). If the rate paid by both is the same, it is most likely that he will buy the ones from the United States, because there is greater security and they pay in dollars.

For this reason, if they rise in the neighboring country to the north and remain the same in ours, numerous capitals invested in Mexico will go to the United States; that can cause problems with the amount of reserves that the Bank of Mexico has, and generate a devaluation of the peso. "That's what you're trying to avoid," he said.

It is difficult for Banxico not to respond to the increase in interest rates in the United States with a similar increase because -unlike this one, which does not have to worry about its exchange rate, because the international currency is the dollar-, for us that is important , said the expert.

The economist considered that global production chains are currently being reestablished, and this may help to reduce the pressures on price increases.

UNAM

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