What’s Happening in Mexico?

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The Central Bank of Mexico brought forward its policy meeting by one week and cut the reference rate by 50 points.

This came fast on the heels of the Fed’s own rate cut of 100 basis points, leading to a wider interest rate spread. In fact, the interest differential is higher now than before the Banxico joined the rate-cutting cycle.

Presumably, this would lead to further strength in the peso. But, with all the risk aversion in the markets, that hasn’t been the case.

In particular, what’s worrying analysts and maybe why the Banxico wasn’t more aggressive in its rate cuts, is the potential for a rise in inflation.

Regular Measures Are Not Enough

Of course, given the unprecedented financial situation as a result of COVID-19 (with one of the members of the Banxico’s board being confirmed as infected), usual criteria don’t apply.

Inflation isn’t as important as keeping the economy from collapsing outright.

Yet, Mexico seems to have managed to stay away from the pandemic. The country has reported extraordinarily low numbers of active cases and deaths.

Notably, President Lopez hasn’t expressed as much concern as other leaders for the pandemic. And, he continues to encourage the economy.

There have been a couple of theories for why Mexico is in a unique situation.

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There’s More than Meets the Eye

The more cynical explanation for Mexico’s lack of COVID-19 cases is that they simply aren’t being reported because they aren’t bothering to test.

A lower number of infections means fewer lockdown measures are necessary. Therefore, less economic impact. This accusation is often leveled at many countries, with some openly admitting that they simply do not have the resources to do enough tests.

Another, perhaps more hopeful explanation, is that the disease spreads less virulently in warmer weather or climate. Or, perhaps more accurately, in more arid conditions.

The theory is that the virus cannot survive as long on surfaces that dry out quicker. This would explain the slower spread in North Africa and the Middle East, yet still the rapid spread in tropical countries like Indonesia and the Philippines.

That said, neither explanation or hypothesis has been proven.

Not Out of the Woods

But, even if Mexico has significantly fewer cases than other countries, it doesn’t mean it’s immune to the world economic fallout.

Countries are tightening their borders, radically slowing down world trade. This is a vital consideration for Mexico which depends on exports to the US.

On the other hand, Mexico might actually benefit from the lower crude prices, since they have become a net importer of late. That might help marginally offset what many economists see as inflation coming from the inevitable government stimulus programs.

What Now?

Banxico isn’t supposed to meet again for another month. But, of course, given the circumstances, that does not mean we can’t have action from the bank soon.

The BMV has followed the rest of the world’s markets down over fears of lack of liquidity. The question is whether the Banxico is going to catch up with other central banks’ more aggressive moves.

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