Mexico Central Banker Says Policy Makers Digesting Yield Spike

U.S. stimulus and rising yields have sparked a readjustment across markets with an as-yet unclear impact on inflation and growth, said Banco de Mexico Governor Alejandro Diaz de Leon ahead of a key rate decision later this month.

Mexico’s bond yield curves performed favorably during the pandemic compared with emerging markets, Diaz de Leon told the country’s annual banking convention on Thursday. In a subsequent interview with Bloomberg News, he said the central bank will assess how inflation is reacting as investors tweak their portfolios on the arrival of U.S. stimulus.

“We are in the process of digestion,” Diaz de Leon said by telephone. “It’s part of what we will be evaluating, together with a reassessment of the inflationary process and the factors behind it.”

Mexico Central Banker Says Policy Makers Digesting Yield Spike

The central bank, known as Banxico, faces a narrowing path to cut rates again at its March 25 meeting after resuming easing early last month with a quarter-point reduction to 4%, the lowest in almost five years. Inflation accelerated to a four-month high of 3.76% in February, led by rising fuel costs, and the central bank expects consumer prices to rise above its 4% target ceiling during the second quarter before slowing to 3.6% by year-end.

Banxico has slashed rates 12 times since August 2019 by a total of 4.25 percentage points, providing monetary stimulus to an economy that in 2020 registered its worst contraction in almost a century. President Andres Manuel Lopez Obrador, on the contrary, has declined to take on debt to boost spending, limiting any significant fiscal expansion.

A rout on U.S. longer-term government bonds accelerated in recent weeks as the accelerating vaccination campaign and movement of the stimulus plan toward completion boosted bets on an economic recovery in Mexico’s northern neighbor. Rates on 10-year Treasury notes are at almost 1.63%, climbing to pre-pandemic levels, amid expectations of faster inflation.

Diaz de Leon, 51, said the uncertain impact of the $1.9 trillion stimulus plan approved in the U.S. last week explained the market’s recent volatility. Mexico’s inflation trajectory would depend on how U.S. demand behaves and its effect on global oil prices, he said, adding that the economy continues to have significant slack.

“We are still in a level of negative output gap,” the governor said. “We hope that the rest of this adjustment keeps happening in an orderly manner.” He added that the recent market tide could also partly retrace.

“Whole Movie”

Last month’s unanimous rate cut decision took some Banxico-watchers by surprise, as several economists had expected a divided vote by the five-member board. Without giving hints about future moves, Diaz de Leon said analysts don’t have “the whole movie” to review, as the bank’s board does.

“Neither the markets nor the analysts have the set of information and forecasts that we have in front of us,” he said.

The Yale-educated official, whose term finishes at the end of the year, declined to comment on his future at the institution where he started his career 30 years ago. It will be up to Lopez Obrador whether to nominate him again, or turn to a new candidate.

Regarding the peso’s recent depreciation, Diaz de Leon said the free-floating currency had been an important “shock absorber” last year, before a recovery took place. The Mexican currency on March 8 dropped to its lowest level since October versus the dollar, before recovering part of the losses. It was little changed early Monday, at 20.69 per dollar.

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“It is not just the latest data point or the latest data, it’s the whole process that we try to incorporate into the conduct of monetary policy,” Diaz de Leon said.

©2021 Bloomberg L.P.

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