Monetary and fiscal announcement in Mexico puts the economy in the right track

MEXICO - In Brief 17 Feb 2016 by Mauricio González

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Banxico announced an unscheduled monetary policy decision of increasing domestic interest rates by 50 basis points and the Exchange Commission (formed by the Ministry of Finance and the Central Bank) announced the suspension of the existing FX auctions of up to USD$400m in daily USD and the launching of discretionary interventions in the FX market aimed at supporting the currency. In turn, the Ministry of Finance announced some austerity measures and a reduction of Mex $ 132 billion pesos of public spending, in accordance with potential oil revenue loss in the forthcoming months. These measures are intended to show a strong commitment by the mexican government to preserve consistency of key prices, meaning inflation, interest and Exchange rates as well as wage increases. Th mexiccan peso has been the weakest currency amongst emerging countries, and the risk of higher inflation as well as further capital flight from foreign and domestic investors was growing. In order for the stabilizing effects of these measures to take effect, the government spending cuts will need to materialize as son as possible and not repeat last February’s experience, when the mexican authorities announced a 0.7% of GDP spending cut, without complying until late in the second half of 2015. The interest rate hike alongisde with lower public spending may cause a negative 0.1% effect on GDP, which doesn’t seem to be a high Price to pay in order to preserve macroeconomic stability. As long as fiscal austerity is enforced and monetary policy keeps rewarding the higher risk conditions that Mexico faces due to weak oil markets and international financial volatility, we estimate confidence about the eco...