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Change of direction to test Mexico’s central bank as inflation soars

By on November 24, 2021 0

MEXICO CITY, Nov. 24 (Reuters) – Mexican President Andres Manuel Lopez Obrador’s surprise reshuffle of the process for appointing the next head of the Bank of Mexico (Banxico) has cast doubt on the bank’s rate-tightening cycle as that it is struggling to control high inflation.

Lopez Obrador, a left-wing populist who has already appointed three of Banxico’s five board members, has rejected the candidacy of former finance minister Arturo Herrera. Instead, he proposed a relatively unknown senior finance official, Victoria Rodriguez, as the first woman to head the bank.

The news hit the Mexican peso, which fell as much as 2% to 21.6070 per dollar on Wednesday, its lowest level since March 8, before cutting some of its losses.

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Some analysts said the move called Banxico’s independence into question, despite Lopez Obrador’s promises that there would be no government interference or interference in the bank’s decisions.

“The uncertainty created by this development is also highly untimely given that the central bank struggles to keep inflation under control and amid drifting inflation expectations,” Goldman Sachs economist Alberto Ramos said. .

Annual inflation rose faster than expected during the first half of November to reach over 7%, the highest rate in over two decades and more than double Banxico’s inflation target of 3 % plus or minus a percentage point.

Banxico raised its key rate by 25 basis points on November 11 for the fourth consecutive policy meeting, raising it to 5.00%.

Rodriguez is expected to replace outgoing governor Alejandro Diaz de Leon, whose term will end at the end of 2021. His appointment must be ratified by the Mexican Senate, which should be a formality given the government’s comfortable majority.

Some Rodriguez analysts would tip Banxico in a more conciliatory direction.

“The 5-member board will remain autonomous, just more accommodating. We must take into account that most emerging countries and specially advanced economies already have accommodating central banks waiting for many inflationary shocks to subside.” , said Joan Domene, senior economist at Oxford Economics.

Nonetheless, given the extraordinary inflationary challenges, Banxico should continue to raise rates.

“We doubt that this appointment changes the image of monetary policy,” said Nikhil Sanghani, Latin American economist at Capital Economics.

Sanghani expects Banxico’s tightening cycle to remain gradual with four more rate hikes from 25 basis points to 6.00% by mid-2022.

“The main risk in our view is that the peso will come under additional pressure, as it could lead to more aggressive tightening, even under a more accommodating board next year,” Sanghani said.

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Reporting by Anthony Esposito; Additional reporting by Miguel Angel Gutierrez Editing by Alistair Bell

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