Banxico insists that the Mexican economy has expanded its downward bias due to uncertainty
In its monetary policy statement, the autonomous entity said that the Mexican economy continues to face "significant risks" in the medium and long term, which could even affect its growth capacity and inflation.
"In this regard, it is particularly important that in addition to following a prudent and firm monetary policy, the adoption of measures is promoted that foster an environment of confidence and certainty for investment, greater productivity, and that public finances are consolidated sustainably," said Banxico. It is also essential to strengthen the rule of law, fight corruption and combat insecurity."
Banxico said that domestic financial markets have moderated their volatility, once the threat of tariffs on imports of Mexican products by the United States has ended.
However, there are still risks for the global economy, such as an eventual escalation of trade tensions between the United States and its main partners, among others.
"The balance of risks to growth has become more uncertain and has expanded its downward bias," added Banxico, whose board of governors opted on this occasion to leave intact the key interest rate at 8.25%.
In terms of inflation, the monetary entity specified that there persists "a high degree of uncertainty" in the risks that could influence its performance.
On May 29, Banxico estimated that the National Consumer Price Index (INPC) will reach its target of 3.0% until the third quarter of 2020.
Until the first half of June, Mexican inflation stood at 4.0% in the year-on-year variation.
Mexico, the second largest economy in Latin America after Brazil, depends largely on economic cycles in the United States and is in a phase of deceleration in line with the global pace.
In 2018, the Mexican economy grew by 2.0%.
Banxico estimates growth for the local economy this year, in a range between 0.8 and 1.8%.
Mexican President Andres Manuel Lopez Obrador, who took office last December 1, has promised to bring the country's economic growth at rates of 4%, through its policy of austerity and combating corruption, to allocate more resources to productive projects.
The Bank of Mexico maintains a reference rate of 8.25 percent
Banxico left the reference rate at 8.25 percent, with which it remains at its highest level since early 2009.
For the fourth consecutive time, the Governing Board of the Bank of Mexico (Banxico) decided to maintain the target for the overnight interbank interest rate at a level of 8.25 percent, although one member voted to reduce it by 25 basis points.
In its fourth announcement of monetary policy of the year, Banxico reported that although between April and the first half of June of this year, general inflation fell from 4.41 to 4.00 percent, "a high degree of uncertainty persists in the risks that could Influence inflation. "
Thus, in line with the expected by the market, and in an action similar to that taken by the Federal Reserve (Fed) of the United States two weeks ago, the Banxico left the reference rate at 8.25 percent, with which it remains at its highest level since early 2009.
The Bank of Mexico cuts expectations of economic growth for this year
The Bank of Mexico (Banxico) cut its expectations of economic growth for this year, but kept those related to 2020 unchanged, according to its January-March 2019 Quarterly Report.
Now, the central bank forecasts that the Gross Domestic Product (GDP) will grow between 0.8 and 1.8 percent in the first year of the government of Andrés Manuel López Obrador, from a forecast of between 1.1 and 2.1 percent. For 2020 it maintained its expectation between 1.7 and 2.7 percent.
According to the January-March 2019 Quarterly Report of the central body, these projections are given in a context wherein the first quarter of 2019 the weakness that the Mexican economy had exhibited at the end of 2018 was accentuated, reflecting both external and internal factors, some of them of a transitory nature.
Specifically, the decline in economic activity was a reflection of the contraction of both secondary and tertiary activities, while at the end of 2018 and in the period that reported private consumption showed a weak performance; and both remittances and consumer confidence remain at high levels.
T-MEC and Pemex, greater risks
Among the main risks for the growth of the Mexican economy are: that the process of ratification and implementation of the T-MEC is delayed and generates greater uncertainty, affecting investment; greater internal uncertainty that affects investment and consumption; that there is a deterioration in the debt rating of Pemex or in that of the country and that there are new effects on the production or distribution of goods and services.
Also, uncertainty regarding the possibility of greater commercial disputes worldwide; those episodes of volatility are observed in international financial markets; and a slower-than-expected deceleration of the global economy and trade are risks for the national economy.
Forecasts for upward inflation
Forecasts for annual general inflation adjusted slightly upwards due to higher forecasts for energy prices and recent increases in core inflation, in particular, higher than expected increases in the prices of some services.
Thus, the previous revisions of Banxico affect the forecasts of shorter term and its effect is considered to be transitory, for which the forecast shows a convergence to the central body's goal in the third quarter of 2020.
25 Years of Autonomy and Advocacy of Banxico
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.