Experts: Banxico to stay course under new chief

Tuesday, November 14, 2017

With a new central bank governor to assume leadership of Mexico's monetary policy board in December, analysts see little change in the way the board carries out policy.

Experts agree the benchmark rate will likely stay at 7% until after the July elections, before seeing at least one cut in 2H18, regardless of who is governor at the central bank or winner of the elections.

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President Enrique Peña Nieto is expected to name the new bank chief next week, with outgoing governor Agustín Carstens to give his final quarterly inflation report November 22 before stepping down November 30, as he prepares to assume leadership of the Bank for International Settlements mid-December.

The move was delayed in February amid economic anxiety surrounding the inauguration of US President Donald Trump and Carstens' reputation as a needed stabilizing force in Mexico.

Concerns raised

The change at the helm has nevertheless sparked concern for Mexico's economy, which now faces a number of risks. One is tied to the rocky Nafta re-negotiation process, just as the fifth round of talks is getting underway in Mexico City. Another worry will arise with next year's elections, where frontrunner Andrés Manuel López Obrador (AMLO) is seen as a risk to continued structural reforms.

"The change at the Banco de México won't produce big changes in the criteria for handling monetary policy," said Eduardo Sojo, economic advisor to former President Vicente Fox, economy minister under Felipe Calderón and currently member of economic think tank CIDE, in an email to BNamericas.

Sojo stressed that the decisions of the board are made collegially among all five board members, and that the bank's team of economists is "capable, responsible and professional."

In an interview with BNamericas, Marco Oviedo, Barclays' chief economic analyst for Latin America, also hailed the collegial nature of the board's decision making, adding "Someone new may have ideas about transparency, the way to communicate monetary policy. For example someone talked about taking minutes with the specific names of who thinks such a thing and who says another. [So, they might support being] more transparent, but in terms of monetary policy ... I would not expect a big change. I believe that prudence, orthodoxy, being conservative ... has been the main mandate of Banxico, and I believe that the arrival of someone new should not change that."

Oviedo said the list of candidates is down to finance minister José Antonio Meade, vice minister for revenues Miguel Messmacher and current policy board member Alejandro Díaz de León.

Banorte-IXE senior analyst Alejandro Cervantes said he agrees on Meade and Díaz de León, but suggested the third person on the list would be Pemex CEO Antonio González Zelaya.

The discrepancy is indicative of multiple media reports showing broad variation on the third shortlisted candidate but holding onto Meade and Díaz de León as top picks.

An op-ed by Maricarmen Cortés in local business newspaper Dinero en Imagen suggested that a decision between Meade and Díaz de León comes just before Peña Nieto's party, PRI, chooses its candidate to challenge frontrunner AMLO, meaning the selection of Díaz de León would almost certainly mean Meade was being primed as PRI's presidential candidate.

"[Whomever] the president chooses to replace Carstens ... in the short term would not change monetary policy, because four of the five remaining members on the governing board would be staying," Cervantes told BNamericas in an interview, adding the nominee would also require Senate confirmation.

"Diaz de León has the most dovish bias within the governing board; however, he has a very strong hawk [at his side], which is Javier Guzmán, and two neutrals, which are Roberto del Cueto and Manuel Ramos Francia," added Cervantes. "If Díaz de León wanted to reduce the benchmark interest rate in the very short term, I believe that the current composition of the governing board would not allow him to adopt a looser monetary policy any sooner than December or the first half of next year."

Cervantes noted that whatever happens on the matter over the next year, and US-Mexico relations, will become much clearer after the Mexican elections, US mid-term elections, Nafta re-negotiations and US fiscal reform.

With those factors settled, he said, "Whoever is governor of Banxico will begin to cut the reference rate sometime in the second half of next year. In fact, we are expecting two cuts of 25 basis points each. The first will be given in July or August of 2018 and the next maybe in September or October."

And if AMLO wins?

Seen as a potential disruptive force to structural reforms, AMLO's strong polling has served as a further distraction for those watching Mexico's monetary policy. The left-wing candidate's chances may improve amid recent fracturing and turmoil among the traditional major parties.

Asked if who wins matters, Cervantes said, "It matters with respect to the perception markets are going to have on whoever may be the next president of Mexico."

"In any case, even if López Obrador wins the elections, the composition of the [upper and lower houses of congress] will not allow big changes," said Cervantes. "To some extent, our baseline scenario is that this process of implementing structural reforms will continue and, in this regard, Mexico will have the opportunity to cut the reference rate."

"I don't see the board changing its criteria regardless of who the president of the republic is," added Sojo, adding that the greatest contribution the bank can make to Mexico is economic stability.

Oviedo noted that López Obrador has been "very emphatic that he would respect the autonomy of the [central bank]," though adding, "he complained that Carstens was meddling with Mexico's foreign policy by commenting on the FTA and the relationship with the US."

"We should review his statements, but I think we are going to see more intense discussion between the two institutions – the federal government and Bank of Mexico – but I think they will respect each other," said Oviedo.