Mexico’s central bank is considering all policy tools as it monitors a range of possible shocks looming from the US and globally, after an already rocky year, deputy governor Alejandro Díaz de León said.
“There are several risk factors still at play,” the Banco de Mexico deputy governor told GlobalMarkets. Díaz de León stressed that “prudence” was critical as the bank watches how the risks evolve.
“Everything is conditional on the type of shock or news that we get,” he said. “We should not discard any type of reaction according to different types of shocks.”
As Canada, Mexico and the US meet for a fourth round of trade talks this week, Díaz de León said that the results would be pivotal for the economy: “The outcome of that negotiation is very important to Mexico.”
Despite new comments this week from the US president regarding abandoning the North American Free Trade Agreement, it is too soon to discuss contingency options, Díaz de León said. “It’s very important to let the process run,” he said of the Nafta negotiations. “There is a process underway as we speak, here in Washington... It’s been very important for Mexico to be a very open economy both in terms of trade and financial flows.”
Tight monetary policy and a flexible exchange rate regime have cushioned the economy from a series of economic shocks this year, he added.
“The floating exchange rate regime has worked very well for Mexico. We have been able to develop a very deep and liquid FX market, including spots, forwards and options and swaps markets. This has been very useful to go through some of these shocks.”
The medium term economic implications of scrapping Nafta on Mexico are unclear, analysts at Capital Economics said yesterday. But the effects would be ameliorated to a certain extent by the flexible exchange rate.
Banco de México has lifted Mexican interest rates to 7% this year from 4.25% 12 months ago. The bank’s action has garnered praise during a period of severe currency volatility and market nervousness stemming from the implications of changing US trade policy.
“Definitely we have had throughout the year several shocks that have translated into higher inflation,” said Díaz de León. “We have tightened monetary policy to the current level of 7%. We believe that level is consistent with a reduction in inflation in the next months and especially towards next year.”
Underlying annual inflation has risen from 3.07% in September 2016 to 4.8% last month.
The deputy governor declined to comment on speculation that he will be promoted later this year, when Agustín Carstens leaves to take the top spot at the Bank for International Settlements.