Q: Banco de México started hiking rates long before the US Federal Reserve. Do you expect further hikes this year?
A: I would begin by pointing out that the inflationary outlook in Mexico has been evolving and has become increasingly challenging and uncertain. To deal with this scenario, Banco de México has increased the policy rate by 375 basis points (bps) since June 2021, increasing 225bps in 2022. An important part of this tightening actually took place before the first increase of the federal funds rate.
In our latest Monetary Policy Statement we announced that for the next policy decisions, the board intends to continue raising the reference rate and will evaluate taking the same forceful measures if conditions so require.
the board intends to continue raising the reference rate and will evaluate taking the same forceful measures if conditions so require
Q: Raising interest rates in Mexico and other jurisdictions might curb economic activity. Are we likely to see a context where the economy contracts with inflationary pressures at the same time, like in the 1970s?
A: Our current real gross domestic product (GDP) forecasts (published in our most recent quarterly report) anticipate growth rates of 2.2% and 2.4% in 2022 and 2023, respectively. We are also expecting inflation to meet our 3% target in the first quarter of 2024. As such, our baseline scenario is one where inflationary pressures subside and the economy grows. That said, there are risks that require us to be very vigilant of the evolution of both variables. We believe that the best contribution a central bank can make to promote economic growth over the long term and improve the wellbeing of the population is taking the necessary actions to keep inflation low and stable.
Q: Where do you see sources of growth in the Mexican economy, especially in the context of historical muted economic expansion compared with other emerging markets?
A: Growth is expected to be relatively balanced between external and internal sources. Externally, while there are risks to the economic outlook in the US, our main export market, the baseline case is one of growth in that country, which should provide continued support to our exports. Internally, consumption and investment are expected to continue to improve gradually. Moreover, there are sectors that remain below their pre-Covid-19 pandemic levels. As such, the ongoing recovery from the pandemic should still provide some momentum for growth. At the same time, it is clear that Mexico will need to continue to take measures to increase investment and productivity, in order to foster higher growth rates over the medium term that allow for an increased welfare of all Mexicans.
Q: Banco de México plans to launch a central bank digital currency (CBDC) by 2024. Are there updates on this front?
A: Implementing a CBDC is part of Banco de México’s strategy to achieve a payments system that allows all Mexicans to send and receive secure, immediate and efficient electronic payments. With financial inclusion in mind, we are currently working on a CBDC design that will be compatible with the intermediation role of commercial banks and will deliver more efficient payment services.
Q: What are the main challenges and opportunities the Mexican banking sector is currently facing?
A: The Mexican banking sector faces significant challenges posed by the current global economic environment. Mexican banks hold capital and liquidity levels that amply exceed regulatory minimums, allowing them to keep, in general, a sound position to face possible adverse scenarios. This would enable banks to expand credit when conditions allow it. Aware of the relevance of continuously improving our regulatory framework, as well as the microprudential tools to manage risks, we have resumed the implementation of several standards that were paused during the pandemic, such as the IFRS9 accounting standards.
Q: Mexico lags in terms of financial inclusion. What do you think can be done to solve this issue?
A: Financial exclusion is related to social problems such as informality, lack of connectivity and limited financial education. It is a multifaceted issue that requires long-term commitment and coordination between financial and non-financial authorities and the private sector. State-owned development bank Banco del Bienestar (BB) is deploying 2700 branches across the country; this is going to allow the disbursement of the government’s social benefits through BB accounts. Another line of action is to leverage technology. CoDi, the central bank’s digital payments system, is an ongoing effort in this direction. Promoting competition, consumer awareness and consumer protection are key ingredients for inclusion.
