Mexico’s Central Bank (Banxico) waited a week to sock it to creditors nationwide after Treasury and Public Finance Secretariat (SHCP) backed down from continuing to implement the latest of the fuel hikes before totally liberating the price, allegedly around April.
The 0.50 percent inter-bank interest rate increase from the already high 5.75 to 6.25 percent carried by Banxico was “to anchor inflation expectations.”
This is sure seen as a contradictory statement as the increase will hit credit holders hardest and spur inflation, contrary to what Banxico is claiming.
The Jan.1 huge 20 percent tax increase on the price of fuels dislodged all stability expectations and sent the inflation rate soaring from 3.1 to 4.72 percent, a 1.7 increase as officially stated by the government’s economic gauge, the National Statistics and Geography Institute (INEGI).
Up until now Banxico Governor Agustín Carstens had been playing on the policy of a standard and stable 3 percent annual inflation rate which up until last December kept prices down and had given the much sought (by Banxico) macroeconomic stability based on the nation’s $175 billion reserves and the $90 billion open credit offer the International Monetary Fund (IMF) keeps open just in case President Enrique Peña Nieto follows the path some of his Institutional Revolutionary Party (PRI) predecessors, that is, sending the nation’s finances into bankruptcy.
What both the fuel price increase and the new interbank interest rate have spurred is exactly what Banxico thought they would prevent: inflation.
Though at this moment it is too early to forecast the inflationary trend for 2017, several economists from different banking institutions foresee different inflation growth rates ranging closer to six percent, when the ceiling for 2016 set and complied with by Banxico was three percent. In real rate growth terms that means 100 percent inflation.
Many observers are expecting Banxico to increase the interbank interest rate to as high as 7.5 – that is – another 1.25 increase over the next 10 months, according to one of Mexico’s largest banking institutions, Citibanamex.
This is a huge and economy-threatening increase considering that the U.S. Federal Reserve has only increased by 0.5 percent since 2015, while in that period Banxico has hiked by 3.25 percent.
Everyone’s wondering what game Carstens is playing as in economic circles he is now in charge of doing the dirty job of increasing interest rates as he is already slated to leave the post come July 1, and surely by the time the new Banxico appointee comes in nobody will remember that it was Carstens behind all the inflationary rate hikes.
Simple 101 Economics tells you that inflation hits hardest as an invisible tax to the poorer sectors of a population and this is already the case of the policy that’s being followed by the Peña Nieto Administration spurred by former finance secretary and current secretary general for the powerful Organization for Economic Cooperation and Development (OECD) José Ángel Gurria.
But the OECD has been looking at growth without inflation, and that is just not happening particularly after the “gasolinazo” of January which literally was dumping gasoline into a political burning fire as protests against the measure are running unabated six weeks later.
Did Banxico and Carstens lose control over the stable economic policy the nation had held on a tight-reign since 1999 when Banxico was made an institution independent from the President’s office? It sure looks like it.
The problem now is not if, but how is Banxico going to put a break on inflation particularly after the government official speech was that the fuel price hikes would not affect it.
The political reality is that Carstens seems to be helping his loan shark buddies before he leaves office, very much at the expense of the set wage workers of the nation who like in the old “Sixteen Tons” Negro song, will only get “deeper in debt.”
Thank you very much, Agustín Carstens. This is not being said not by the majority of Mexicans, all poor, but by bankers.