Analysis-Mexican central bank responds to Lopez Obradors pressure with challenging autonomy

Concerns over Banxico’s autonomy, as the Bank of Mexico is called, rose in March after Lopez Obrador announced the central bank’s 50 basis point rate hike hours before it became official.

The left-wing president then apologized, saying he thought the decision was already public.

However, the fork fueled concerns about central bank independence, which emerged in late 2021 when Lopez Obrador appointed Victoria Rodriguez, an unsung finance official, as head of Banxico after defeating his former candidate, the former finance minister. Arturo Herrera, unexpectedly fell.

As Lopez Obrador begins to warn of the risk of higher borrowing costs for the Mexican economy, the central bank has increasingly joined forces to raise interest rates despite the deteriorating growth outlook.

On June 23, Banxico unanimously approved its largest rate hike in recent history – a 75 basis point increase that reflected the move by the US Federal Reserve a week earlier – after 50 basis point increases at each of the four previous meetings.

The next day, Lopez called on Obrador Banxico and other central banks to find ways to curb inflation other than raising interest rates to spare the economy.

But the central bank, of which four out of five board members have been appointed by Lopez Obrador’s administration, is unlikely to be affected by such comments, two senior officials told Reuters, speaking on condition of anonymity.

Government critics agree.

“The bank acts as an independent authority,” said Ildefonso Guajardo, a congressman from the Center Opposition Party Institutional Revolutionary Party (PRI) and former Mexican finance minister. “She’s not trying to please the president.”

The central bank did not respond to a request for comment on whether it would be affected by the president’s proposal.

Guajardo said he believed it was unlikely Lopez Obrador would seriously interfere in Banxico’s independence, as the president had understood that Mexico’s poor, its mainstay in the population, would suffer the most from financial instability.

Instead, Lopez Obrador’s recommendations to Banxico were intended to make it clear to his supporters that he was not responsible for the pain of higher interest rates, said Raul Feliz, an economist at the think tank CIDE in Mexico City.

The central bank has tended not to respond to Lopez Obrador’s comments, although even Gerardo Esquivel, arguably the most dumb board member elected by the president, has come into conflict with him publicly.

PUNCHY PESO

During his administration, Lopez Obrador has repeatedly talked about the stability of the Mexican peso, which is supported by Banxico’s rate hikes.

With inflation largely imported and approaching its 21-year high (almost 8%), a stronger peso dampens price pressures, Feliz said. Lopez Obrador will be on guard to endanger that situation as the 2024 presidential election approaches, he added.

“Imagine if we arrived at the election with an exchange rate that was out of control and an inflation that was out of control,” Feliz said.

Lopez Obrador has dominated the government to such an extent that a traditional counterweight to the central bank, the Treasury, has been undermined, potentially giving Banxico greater autonomy, said Patricia Terrazas, an opposition spokeswoman and former head of the Mexican House finance committee. of Commons. of Congress.

Political clashes resulted in Lopez Obrador’s finance minister resigning just seven months after taking office. Two years later, his successor, Herrera, was pushed aside to head the central bank before the president dropped him for Rodriguez.

Although she had no previous experience with the central bank, Rodriguez has acted professionally, and Banxico’s independence has “passed many tests,” said Guajardo, the PRI legislator.

Banxico’s Board of Directors is increasingly voting unanimously as it intensifies its efforts to tackle rising inflation.

When Banxico entered its current austerity cycle last summer, it announced six consecutive split-rate decisions. But in two of the last three rate hikes, decisions have been unanimous, despite the president pushing for a more dove-like policy.

“They understand the responsibility that the central bank bears,” said Terrazas of the center-right National Action Party. “So far, the bank is doing its job.”

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