Banxico’s Sanchez Says Peso’s Inflation Impact Has Been ‘Modest’by and
Mexico’s inflation panorama is still ‘very well controlled’
Central bank refrained from supporting peso after Trump win
Mexico’s inflation has been "very well behaved" and pass-through from the peso’s depreciation to consumer prices has been moderate, deputy central bank Governor Manuel Sanchez said in an interview.
Central bank steps to keep inflation in check have helped minimize the secondary effects of the currency’s weakness, said Sanchez, who is widely seen by economists as one of the most hawkish members of the central bank board led by Agustin Carstens. While the peso’s decline to record lows on Donald Trump’s election victory may elevate risks, Sanchez didn’t think Mexico would need to act in an unprecedented fashion to curb inflation.
“Until now the pass-through from the exchange rate to prices has been very modest,” Sanchez said Friday at Bloomberg’s office in Mexico City. “We’ve said that the risk worries us, but that doesn’t mean that there’s a linear, automatic, one-to-one relationship" between the peso and inflation.
Inflation quickened less than expected in October and reached slightly above the central bank’s 3 percent target range for the first time in 18 months. Mexico held off raising borrowing costs or announcing support measures for the peso after Trump’s victory sent the currency tumbling as much as 12 percent, arguing that policy makers needed to wait and see how the markets would react beyond the initial volatility.
Since then, banks from Nomura Holdings Inc. to Natixis SA have dramatically pushed up their interest-rate forecasts, with Blackrock Inc. expecting the central bank to boost the key rate as much as 2 percentage points at its Nov. 17 meeting.
The slumping peso has already forced the central bank to raise rates by 1.5 percentage points this year to 4.75 percent to head off inflation stemming from rising import costs. Carstens announced the first of those increases in February after an unscheduled meeting, and together with the Finance Ministry began discretionary dollar sales. He said before the U.S. election that he was discussing a contingency plan with the ministry should a victory by Donald Trump spur market volatility.
Sanchez re-affirmed Carstens’s view that Mexico needed more time to see how Trump’s election would affect markets and said that for now they are functioning well and with sufficient liquidity. When asked if Mexico needs to seek unprecedented measures, and when told some economists are forecasting as much as a 200 basis point increase in the interest rate, Sanchez said "I wouldn’t go that far."
While Mexico refrained from taking immediate action after the election, Finance Minister Jose Antonio Meade said in an interview Wednesday that measures used in 2008 in the aftermath of the Lehman Brothers crisis, and actions taken after the U.K. voted to leave the European Union are "under consideration as we get more information."
"Should we see any disruptions, should we see any excess volatility, we have the instruments to intervene," Meade said.
After Brexit, Mexico’s central bank raised borrowing costs and the ministry cut fiscal spending, and during 2008 policy makers used several tools to ensure liquidity, such as reducing the amount of long-term government bond sales and auctioning interest-rate swaps. The ministry announced changes to its bond-sale schedule Thursday and swap auctions are under consideration this time around as well, two people familiar with the contingency plan said before the election. One of the people said Mexico may allow more flexibility for pension funds’ risk-management rules.
Sanchez said Mexico has acted responsibly by cutting spending in its fiscal budget, which passed Congress yesterday. Sanchez said it was too soon to forecast how Trump’s policies may affect Mexico’s economy and that if the U.S. president-elect’s economic plan stimulates growth in his country that would benefit Mexico.
Economists have lowered their expectations for economic growth in Mexico in the days after Trump’s election. Axel Christensen, Latin America chief investment strategist at BlackRock, cut his forecast for 2017 growth to 1 percent from 2 percent. JPMorgan cut its growth estimate for next year to 1.8 percent from 2.2 percent, saying the uncertainty created by Trump and the transition to his government could weaken business sentiment in Mexico.