The outgoing Governor of the Bank of Mexico has spoken out on the importance of protecting the bank’s constitutional mandate as the institution faces increasing political pressure from President Andrés Manuel López Obrador and his party.
The bank’s autonomy was recently called into question when López Obrador withdrew his candidate for the office of next governor and replaced him with a little-known public sector economist.
Outgoing governor Alejandro Díaz de León said he was confident that the bank would continue to fulfill its mandates as long as its legal framework remains intact.
“The most important thing is to uphold the constitutional mandate and the law that the bank has today,” Díaz de León told the Financial Times in an interview. “I think that is the best guarantee that an environment of stability and low inflation can be sustained.”
Victoria Rodríguez Ceja will take over the bank’s first female governor on January 1st and lead a majority of women on the board.
Tensions between the central bank and politicians began to mount last year when a lawmaker proposed legislation to the ruling Morena party to force them to buy excess dollars. The proposal would have undermined the bank’s autonomy, critics said. After strong resistance, it was finally discontinued.
The board of directors of the central bank also got into political controversy this year when they urged back against López Obrador’s attempt to use Mexico’s share of a global liquidity injection from the IMF to repay national debt.
Back and forth with the president and his party is part of the normal functioning of democracy, said Díaz de León.
Central banks are at the forefront of curbing rising inflation, and last week many of them tightened their monetary policies more aggressively. Politicians are facing a “critical situation for dealing with monetary policy,” said Díaz de León. “It is very clear that central banks can do their job better in an autonomous framework, and it is really important to maintain that.”
The Bank of Mexico faces a delicate equilibrium to steer the country’s fragile development from the economic impact of the coronavirus pandemic. A sudden drop in production in the third quarter of this year put pressure on the five-man board of directors not to stall the recovery by hike rates too quickly.
However, Mexico is facing an inflationary spiral that poses a dilemma. Price growth has reached its highest pace in 20 years and prompted the bank to surprise the markets by hitting rates sharply at its meeting earlier this month.
Even so, Díaz de León warned that Mexico may not be looking to raise interest rates significantly in the future.
“Sometimes it looks like there are two tracks, the track of 25 [basis point rate rises] and the trace of 50. . . The truth is in the bank, we don’t see it that way, ”he said. “In the future, all options will be available and none are predefined.”
Mexico has seen outflows of foreign funds into stocks and government bonds since the pandemic began, another factor that could put pressure on the bank to raise interest rates to attract foreign capital.
However, Díaz de León downplayed the economic impact. “The adjustment has been arranged and gradual,” he said. “We hope that as the risk subsides, the appetite for instruments in local currency will reappear.”
After taking power in December 2018, López Obrador implemented a comprehensive austerity course, which he adhered to during the pandemic. The IMF, which has advocated strict spending rules in the past, has urged the government to increase its spending to combat the economic effects of Covid.
The Bank of Mexico lost staff in the first few months of López Obrador’s government, especially after a law was passed to cap salaries in the public sector. The change in personnel has stabilized since then, said Díaz de León.
This story was changed after it was released to reflect the magnitude of possible future rate hikes.
