Bank of Mexico receives global recognition

Bank of Mexico was awarded the Grade A distinction for keeping the Mexican currency under control with inflation below 4%.

El Banco de México (Banxico) fue acreedor al Grado A, un reconocimiento que constituye el nivel más alto en la escala prevista en el Reporte de Bancos Centrales del Global Finance.
El Banco de México (Banxico) fue acreedor al Grado A, un reconocimiento que constituye el nivel más alto en la escala prevista en el Reporte de Bancos Centrales del Global Finance.

The report evaluates the performance of 94 central banks worldwide, considering inflation management, interest rate policy and other aspects. The distinction was made during the fall meetings of the International Monetary Fund (IMF) and the World Bank (WB).

Despite the national and international challenges and volatility faced by the Mexican peso, as one of the most traded currencies in emerging markets, the publication noted that inflation has been below 4 percent.

In addition, he said, the Mexican currency has remained under control and foreign holdings of domestic bonds have remained stable. As a result of the above, he said, the Bank of Mexico retains high credibility, in addition to being considered a factor of stability.

On the other hand, the governor of Banxico, Alejandro Diaz de Leon, received the recognition of Central Bank of the Year for Latin America, which is granted by Global Markets for his leadership of Banxico.

Recognition is provided through feedback from economists and experts in a variety of areas, such as monetary policy management, inflation control, transparency, institutional strength and independence.

In this regard, Diaz de Leon thanked on behalf of the institution these distinctions and said that they are a great recognition to the work of the members of the Board of Governors and the professional work of the entire team of Banxico, which this year celebrates the 25th anniversary of its autonomy.

By Mexicanist Source Notimex

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The Mexican Constitution requires the central bank to have as its main objective the preservation of the value of the currency.

This year, the Bank of Mexico (Banxico) celebrates 25 years of being an autonomous institution; that is, it cannot be forced to lend money to the government, and no authority can order it to provide credit.

Such is the essence of the autonomy conquered by the central institute with the reform of Article 28 of the Constitution in 1993, which came into force on April 1, 1994.

Being autonomous implies that it determines the policies and instruments to achieve its priority objective, which is to maintain price stability, as well as to perform its other functions.

Thus, if the government comes to have a money problem, not even the President of the Republic can demand that the central bank bail him out or request support to finance public spending.

The Mexican Constitution orders the central bank to have as its main objective to preserve the value of the currency; that is to say, to combat inflation so that consumer prices do not nullify the value of workers' salaries.

The Bank of Mexico has two other secondary objectives, which are to promote a healthy financial system and the proper functioning of the payment system.

In addition, it has budgetary and management independence, because by administering the country's international reserves, which amount to nearly 179 billion dollars, it obtains returns on the investments of these assets.

To fulfill its primary mandate, it was proposed as a punctual goal that inflation should not exceed a level of 3%, with a range of variability of plus/minus one percentage point. Since January 1999, Banxico adopted the inflation targeting strategy as a mechanism to improve communication with the public and strengthen credibility in the central bank.

If it deviates from this target, it has to react to prevent the purchasing power of Mexicans from deteriorating, as inflation is considered a tax that affects lower income earners.

To combat inflation, Banxico has as an instrument of monetary policy the reference rate, which serves to put a cost to money.

If the rate rises, the cost of money via credit and financing becomes more expensive. In addition, being an autonomous bank, no one can ask you to raise or lower the rate in order to stimulate or contract the economy.

As a central bank, it is responsible for providing money to the economy, for which it has two note factories, and has the power to order the Casa de Moneda de México to mint the cash.

In addition, the central bank has the exclusive power to place notes and coins among the public. The issue of banknotes and coins is made according to the demand of society.

Hence, no one can order or ask you to issue more paper money or notes that are required.

Board of Governors

Before obtaining its autonomy, the Bank of Mexico was headed by a general director who was directly appointed by the chief executive in turn.

Today it is headed by a governor and decisions are made collegially through a governing board made up of five members: the governor, who has a casting vote, and there are four deputy governors. Together, the five members are responsible for conducting monetary policy.

While all members of the governing board are appointed by the federal executive, the Senate of the Republic must ratify the appointments. They are appointed in such a way that they are not in function of the political cycles, and they must meet certain requirements to occupy the positions.

Regarding the 25 years of autonomy, the governor of the Bank of Mexico, Alejandro Díaz de León, points out that "when a central bank is subject to the directives of the governments in turn and there are no clear and verifiable limits and objectives for its actions, its faculties have become misused, which has resulted in episodes of crisis that are very costly for societies.

In a text published on the Banxico website, Díaz de León refers to the fact that throughout the twentieth century several countries experienced serious macroeconomic crises, triggered or amplified by the dominance of fiscal needs over the conduct of monetary policy.

Several governments, from both emerging and developed countries, unsuccessfully tried to stimulate economic activity and employment by pressuring the central bank to adopt an expansive monetary policy to finance public spending.

"This use of monetary policy, together with other imbalances, generated distortions and, in many cases, provoked crises of great magnitude", states the article.

Given the traumatic experience of many nations, many countries granted autonomy to their central banks, guaranteeing them healthy independence from the fiscal needs of governments and the political cycle.

Can Autonomy be Measured?

Those who are more specialized in monetary policy or those interested in finding out more about autonomy may be interested in reading the book Strategy, Credibility, and Independence of the Central Bank: Theory and Evidence.

The author is Alex Cukierman and the work was edited by MIT Press, the university publisher affiliated with the Massachusetts Institute of Technology, better known by its acronym MIT. It is considered a classic book of monetary policy literature.

Cukierman is an economist with a doctorate in philosophy who was born in 1938 in Paris, France. He specialized in the field of inflation, economic fluctuations, and macroeconomic theory, and is recognized for his work on the behavior of central banks.

As part of the book, the author brings together his main research in political economy and monetary policy.

What is interesting is that it includes the work he did on the multidimensional evidence of the legal and real independence of a central bank.

He used a sample of up to 70 countries to investigate the interconnections between inflation distributions and central bank independence.

Based on this, Cukierman developed a legal independence index to measure the degree of autonomy of central banks in the world.

He took into account several factors that are assigned a score. For example, it gives 0.20 points to the form and how the appointment of the governing board is made; to the primary mandate of monetary policy, 0.15; freedom in the formulation of monetary policy, with 0.15; and the limits or prohibition of credit to the State, of 0.50 points.

According to Cukierman's indicator, there is a solid autonomy if the set of qualified factors adds up to one, and if it is zero, then it does not have independence from the State.

In his long experience, he has been a visiting researcher at the Swiss National Bank, the St. Louis Federal Reserve in the United States and the European Central Bank, as well as at universities in Princeton and Chicago.

Source: Agencies