Thursday, December 7, 2023

AMLO reveals interest rate rise hours before official announcement

President López Obrador on Thursday rattled the country’s financial sector by declaring the central bank’s interest rate decision before the official announcement.

López Obrador told reporters on Thursday morning that the five-member board had voted to raise rates by a half percentage point to 6.5%, in a preemptive announcement that was seen as a blow to the bank’s independence.

“Yesterday’s decision was taken unanimously and we respect the bank’s autonomy,” he said at his daily morning news conference.

It is not the first time the president has taken financial markets by surprise. Late last year, López Obrador spooked investors when he abruptly changed his nominee to lead the bank, choosing an obscure public sector economist and raising fears at the time over the institution’s independence.

In 2020 a bill proposed by the ruling Morena party sought to force the bank to buy excess dollars, in another move that critics said undermined the central bank’s autonomy. The proposal was eventually shelved after strong opposition.

The Bank of Mexico confirmed that the new interest rate would be 6.5% early Thursday afternoon.
The Bank of México confirmed that the new interest rate would be 6.5% early Thursday afternoon. CC BY-SA 3.0

Experts lined up to criticize the president’s announcement on Thursday, which has again stoked fears that he wants to interfere with monetary policy.

“Since López Obrador entered the presidency, there were a lot of concerns about the autonomy of the Bank of México,” said Gabriela Siller, head of financial and economic research at Banco Base. “With today’s announcement these worries have resurfaced again.”

The Bank of México declined to comment on the news.

The Bank of México became independent in 1994 and has built a reputation in markets for competence. Its new governor, Victoria Rodríguez Ceja, the first woman to hold the post, has sought to reassure markets and opposition lawmakers that she would uphold its autonomy.

Like other central banks around the world, the Bank of México is trying to tame high inflation, which hit 7.29% in Mexico in the first half of March. Analysts have been revising down their expectations for growth.

“I think that this puts the central bank in a bad position,” said Alonso Cervera, chief economist for Latin America at Credit Suisse. “People will be questioning the bank’s autonomy, why does the president know the policy decision ahead of time, who leaked it?”

Thierry Wizman, global interest rates and currencies strategist at Macquarie Capital, said the rate hike was in line with expectations and that the preemptive announcement was an extension of López Obrador’s second-guessing and nudging of the central bank over the past three years.

The Mexican peso reached 20.11 per US dollar, its strongest level since September 2021. Yields on Mexican government bonds across maturities were broadly higher, with the two-year bond yield, which moves with interest rate expectations, rising to 8.46%, its highest since January 2019.

The announcement had been planned for 1 p.m. local time on Thursday. Due to a banking conference taking place in Acapulco — where López Obrador, Mexico’s finance minister and the central bank’s governor are expected to speak, among others — there had been a departure from the standard timings for central bank processes, Bloomberg reported, which had potentially given the president earlier access to the information.

Gabriel Casillas, chief economist for Latin America at Barclays, said that he did not think this would happen again as the bank resumed its typical schedule.

Copyright The Financial Times Limited 2022. All rights reserved.

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