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Central Bank tightens monetary policy to stem rising inflationary
expectations
Despite the recent strengthening in the exchange rate, Mexico's Central
Bank decided to tighten its monetary policy for the fourth time in the
past half year. On 28 March, the Central Bank announced its decision to
raise the so-called short (corto), which regulates the liquidity in the
market, by 75 million pesos to 700 million pesos. The decision took
markets by surprise since they had not expected a further tightening,
given the subdued outlook for domestic demand, a fact that the Bank
explicitly acknowledged in the press release announcing the decision.
However, the Central Bank believes that even though the exchange rate
weakening has not yet fed through to higher domestic prices it has raised
inflationary expectations, which continue to diverge from the Central
Bank’s year-end target rate of 3.0%. The Bank refers to its own surveys of
market perceptions; the Consensus Forecast, in contrast, remained
unchanged over the past three months. Moreover, monetary authorities had
anticipated that headline inflation would converge towards core inflation
and the year-end target by the second quarter this year. However, the
recent development of non-core inflation renders such a development more
complicated, according to the Central Bank. The latest decision to tighten
monetary policy underlines the Bank’s commitment to meet this year’s
inflation target. Last year, monetary authorities missed the official 4.5%
target by a wide margin, as headline inflation reached 5.7%. However, core
inflation remained within the limits at 3.8%, thus restraining the adverse
effects of non-compliance on the Central Bank’s reputation. That said,
Central Bank authorities are likely to adjust monetary authorities
further, even at the cost of a slowdown in economic activity, in order to
avoid missing the target for a second year in a row. Finally, this year’s
target had been defined years ago as the long-term target to meet, when
inflation was still well in the double-digit range, which further
highlights the importance of this year’s target.
Trade balance incurs first surplus in almost six years due to strong oil
price
In February, the Mexican trade balance incurred the first surplus in
almost six years. According to revised figures, the trade accounts showed
a positive balance of US$ 63 million following on a deficit of US$ 263
million in January and a much higher US$ 635 million deficit in the same
month last year. The improvement in the trade balance was due to a strong
rise in exports (+8.6% year-on-year), whereas imports rose at a more
moderate 2.6% pace. Exports profited from higher volume in oil shipments
and a surging oil price, which more than doubled the value of oil exports
compared to February 2002. Non-oil exports increased a meagre 1.4% over
the same period, reflecting the continuous slump in demand for Mexican
manufactures. Imports showed a very mixed picture: consumer imports surged
11.5% over February 2002, which contrasted sharply with a 14.5% decline in
capital goods. Intermediate goods, which account for the bulk of total
imports, increased a moderate 4.5%. Given that intermediate goods imports
mainly serve as input to the manufacturing sector producing for the United
States, the outlook for manufacturing exports is more subdued.
Nevertheless, even though intermediate imports should remain sluggish in
the short term, the trade surplus is likely to vanish again in March, as
the oil price spike appears to have been temporary. While the average oil
price for the Mexican crude oil was 74.2% above the level in the same
month last year, the increase tapered off to “only” 21.9% in March.
Moreover, the current development in Iraq suggests lower rather than
higher oil prices in the immediate future. Consequently, Consensus
Forecast panellists expect the annual trade balance deficit to rise from
the current US$ 6.9 billion by the end of the year. |
