Mexican policymakers caught the markets by surprise this week with extremely aggressive measures. First, Banco de Mexico announced that it had sold dollars outside of the usual auction process. It then followed up with an unexpected intra-meeting 50 bp rate hike to 3.75 percent. In addition, the FX commission announced that it was discontinuing the regular auction program but will maintain the possibility of further “discretionary” dollar sales. To top it off, the Finance Ministry announced large-scale spending cuts.
The rate hike was the biggest surprise, according to many analysts interviewed by Emerging Market Views. More so since Banxico had strongly hinted that any rate moves would largely depend on the US Federal Reserve’s rate policy. Governor Agustín Carstens said that all decisions had been unanimous. He also added that this did not signal a tightening cycle and that today’s hike would have little effect on growth.
The last rate hike was on December 17, 2015, right after the Fed hiked rates. Banco de Mexico just left rates steady on February 4, and minutes from the meeting will be released this week. Clearly a lot had changed since then but this week’s policy response seemed to be an effort to get ahead of the curve and not to just react to events.
The next policy meeting is slated for March 18 and another hike cannot be ruled out “to really cement the central bank’s resolve to maintain confidence in the peso”. Again, this move should be seen as a preemptive move, Win Thin, Global Head of Emerging Market Currency Strategy with Brown Brothers Harriman said in a published note. “Inflation remains low, but is rising and certainly doesn’t warrant a 50 bp move. But we know that policymakers were very worried about the pass-through from a plunging peso, and so they acted accordingly.”
The timing was impeccable. Emerging markets, oil, and “risk” were already rallying this week and Banxico appears to have picked the perfect timing. Granted, Mexico’s actions can be filed perfectly under the “Golden Rules” of FX intervention: 1) surprise the markets, 2) go big, and 3) go with the market, not against it.
Once again, Thin notes, Mexico demonstrates its long track record of policymaking ingenuity and knowhow. “Despite a reputation for being largely hands-off, policymakers there have served notice to the markets that there is always two-way risk present.”
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