Monetary Policy And Its Effects On The Economy In Mexico

Monetary policy and its effects on the economy in Mexico

The monetary policy consists of the drafting, announcement and implementation of the Action Plan taken by the Central Bank (BC), the Monetary Board or other competent regulatory authority of a country that determines the scope and impact of the key drivers of economic activityin that country. The activities that are an integral part of the monetary policy consist of managing the so -called monetary offer and interest rates that aim to achieve macroeconomic objectives such as controlling inflation, consumption, growth and liquidity.

These are achieved through actions such as the modification of the interest rate, the purchase or sale of government bonds, the regulation of change rates and the change of currency amounts that banks must maintain as reservations. Economists, analysts, investors and financial experts around the world expect monetary policy reports and the result of the boards involving decision -making on monetary policy. Such developments have a lasting impact on the economy in general, as well as in the specific industry sector or market.

Monetary policy affects the important facets of the economy, which include attempts to achieve stability / increase in the growth rate of the gross domestic product (GDP), maintain low unemployment rates, support the general or specific economic growth of the sector and maintaincurrency change rates in a predictable range. Monetary policy is different from fiscal policy, since the first is related to indebtedness, consumption and expenditure by private individuals and companies, while the second refers to taxes, indebtedness and government spending.

At a broader level, monetary policies are classified as expansive or contractive.

If a country faces a high unemployment rate during a slowdown or recession, the monetary authority can opt for an expansive policy aimed at increasing economic growth and expanding economic activity. As part of expansive monetary policy, monetary authority often reduces interest rates through various measures that make money savings relatively unfavorable and promotes spending. It leads to greater consumer expense in a variety of goods and services, and a greater offer of money that is available in the market.

Since capital is now available at low rates, both companies and individuals can obtain loans in convenient conditions. With easy financing, companies and companies make investments in manufacturing units, projects and other activities related to the company that help increase employment. People not only obtain jobs, which entails an unemployment reduction, but also obtain a higher available income that is used to make all kinds of purchases and investments. Includes high -price purchases, such as loan properties and a higher expense in daily needs.

Monetary policy is formulated from supplies collected from various sources. For example, monetary authority may consider macroeconomic figures such as GDP and inflation, specific growth rates of the industry / sector and associated figures, geopolitical developments in international markets (such as oil embargo or commercial rates), the concerns raised by groups representing industries and companies. , Results of surveys of renowned organizations and government supplies and other eligible authorities. Monetary policy has a lasting impact on the economy of a nation.

However, policy ads are effective only to the point of the credibility of the authority responsible for drafting, announcing and implementing the necessary measures. In an ideal world, such monetary authorities should work completely regardless of the influence of government, political pressure or any other policy formulation authority. Actually, governments around the world can have different levels of interference with the work of authority.

It can vary from the Government, the Judiciary or the political parties that have a limited role to the appointment of the key members of the authority, and can extend to force them to announce populist measures (such as when the elections are approaching). While developed nations have little or no interference in the work of the country’s monetary authority, many underdeveloped and developing countries face the problem of such political interference.

If a central bank announces a particular policy that talks about measures to reduce the increase in inflation, inflation can continue to be high if the common public does not have or has little confidence of the authority. When investment decisions are made based on the announced monetary policy, the credibility of the authority should also be considered.

The lowest interest rates help this expense activity, since greater utility is derived from the expense of goods and services that the benefits obtained from savings. As more money goes into circulation in the market, the general economic activity is driven, which helps a country out of deceleration or recession. An example of this expansive approach is low -to -zero interest rates maintained by many leading economies around the world from the financial crisis of 2008.

However, the increase in money supply and higher growth rates often lead to greater inflation by increasing prices for the essentials of every day, such as energy, food, basic products and other goodsand services, begins to affect the general cost of living, the cost of doing business and any other facet of the economy. The need to contain the growth and inflation rate that is achieved with contractual monetary policy arises then. By increasing interest rates, its objective is to reduce inflation, reduce money supply in the market, make loans more expensive, make expense unfavorable and promote money savings. Contractive monetary policy can stop economic growth and increase unemployment, but it is often required to control inflation.

Central banks use a series of tools to configure and implement monetary policy. The most popular option is to adjust interest rates, which generates a waterfall effect on the economy in general. For example, it can involve adjusting the specific interest rates that the Central Bank charges in the overcoming that commercial banks take from the Central Bank. When commercial banks can obtain loans from central banks at lower rates, they have more liquidity and credit that they can make available to the economy offering loans to their customers at cheaper rates. If such rates are high, commercial banks will ask for less loans and there will be limited money available in the economy. The second option used by the monetary authorities is to change the reserve requirements, which refer to the funds that the commercial bank must retain as a proportion of the deposits made by its customers. The reduction of this reservation requirement releases more capital for banks through which the funds available to offer loans or to buy other profitable assets can be increased. The increase in this reserve requirement has an inverse effect that helps contain the money supply. The authorities also use a third option called open market operations to expand or contract the country’s banking system. It implies the purchase and sale of government values such as foreign bonds or currencies in the open market. The purchase of public debt increases the amount of cash in circulation and accredits the reserve accounts of the banks. With banks that have more money available in their reserves, they have freedom and competitive pressure to reduce loan rates, which causes loans to be cheaper and help stimulate the economy. The sale of government debt takes money from the market and eventually leads to a narrowing of the money supply. In addition, monetary authority can write policies and use methods to selectively address specific factors for specific purposes.

Moderating activity and risks are clouding world economic perspectives. International trade and investment have softened, commercial tensions remain high and some large emerging markets and developing economies (ed) have experienced substantial pressures in what is known as a financial market. In this less favorable context, ED growth has lost impulse, with a weaker recovery of what is expected in basic products exporters accompanied by a slowdown in basic products importers. The downward risks have worsened. The disorderly evolve, could disturb the activity in affected economies and cause infection effects. Commercial disputes could increase or extend, which would affect the activity of the economies involved and would lead to global negative effects. To face this increasingly challenging environment, an immediate priority for those responsible for the formulation of ED policies is to prepare for possible stress episodes in these, rebuild macroeconomic policy shock absorbers as appropriate and address the adverse dynamics of debt, while whileHistorically low inflation is maintained. In the long term, the need to promote more robust potential growth in promoting human capital, eliminating barriers to investment and promoting commercial integration continues. Regional perspectives. The rebound in ED’s activity has stagnated. The cyclic rebound in regions with many basic products exporters has lost impulse, which partly reflects a substantial deceleration in some large economies, and it is expected that it will stagnate in the coming years. Growth in regions with a large number of basic products importers was solid, but has slowed down and is expected to stabilize around the potential. For all regions, the risks to perspectives are increasingly inclined downward. This edition of World Economic Perspectives also includes a chapter on the challenges associated with the presence of large informal sectors in EDs and policy options to address informality;a box on the perspectives of low continuous inflation in the ED;and essays on the increase in vulnerabilities of debt in low -income countries and the implications of large price fluctuations food for poverty. Grow in shade: Informality Challenges. On average, the production of the informal sector represents approximately one third of GDP and informal employment constitutes approximately 70 percent of employment in ED (of which self-employment represents more than half). Informality is more widespread in less developed economies with large agricultural sectors and a greater proportion of unqualified workers. Although sometimes it provides the short -term advantage of flexibility and employment, a larger informal sector is associated with lower productivity, lower tax revenues and greater poverty and inequality. Overcome the adverse consequences of informality will require a balanced mixture of policies that carefully take into account the specific informality factors of each country. A well -designed policy frame must include measures aimed at reducing regulatory and fiscal charges, expanding access to finance, improving education and other public services, and strengthening public income frameworks.

Emerging markets and developing economies (EMDE) have achieved a notable decrease in inflation, of 17.3 percent in 1974 to around 3.5 percent in 2018. This achievement has coincided with an even greater decrease in inflation in advanced economies. The great disinflation in the EDs has also been accompanied by a growing synchronization of inflation, as evidenced by the appearance of an global inflation cycle.

This has been supported by long -term trends, such as the general adoption of solid monetary policy and strengthening of global trade and financial integration. More recently, interruptions caused by the global financial crisis also contributed to the decrease in inflation. However, the continuation of low and stable emde inflation is not guaranteed in any way. If the wave of structural factors related to policies that have promoted disinflation since the 1970. If the global inflation cycle appears, political leaders can find that maintaining low inflation can be a challenge as great as achieving it.

Debt vulnerabilities in low -income countries (LIC) have increased substantially in recent years. Since 2013, medium public debt has increased by approximately 20 percentage points of GDP and comes more and more non -concessional and private sources. As a result, in most LIC, interest payments are absorbing a growing proportion of government income. Most LICs would be seriously affected by a sudden weakening of trade or world financial conditions due to their high levels of external debt, lack of fiscal space, low foreign exchange reserves and exports and exports. The efforts to reduce vulnerabilities related to debt are a policy priority for many LIC, and a key approach must be to improve debt management and develop national financial systems.

The panorama in Mexico

World economic activity seems to be gaining strength in early 2018 and a series of timely indicators point to greater strength in the coming months. In addition, its generalization continues among the different countries, both of advanced and emerging economies. It is not surprising, then, that the global growth projections for this year and the following have been reviewed upwards. Given its relevance to the Mexican economy, it is important2019.

The impulse shown by the global economic expansion, combined with the stimulus resulting from the fiscal reform recently approved in the USA.UU, the risk balance for world growth in the short term has improved. However, when seen from a longer term perspective, several clouds on the horizon continue to incline this balance down. In fact, recent developments represent a timely reminder of the nature of the challenges we could face in the not too distant future. One of the most important among them is related to the normalization of monetary policy in the US.UU.

In a situation of scarce or no slack in the EE economy.UU, a fiscal stimulus policy such as the one that is being carried out can lead to an acceleration of the increase in prices that, combined with its implications for public finances, could lead to an increase. In interest rates above current expectations. Uncertainty in this regard, of course, is not limited to the US.UU.

As is well known, a notable improvement in economic activity in other advanced economies has been observed, including the euro and Canada area, which has also aroused concern about the possibility of faster standardization of monetary policy in thesecountries. Second, and closely related to the above, the risk of sudden assessment adjustments in some financial assets, particularly in the high -risk segment, has increased.

In fact, mainly as a result of the anxiety mentioned above with the speed of standardization of monetary policy in advanced economies and the possible overvaluation of some of those assets, just a month and a half until 2018, we have already seen a significant increase in thelong -term bond yields in many advanced economies and in strong downward corrections in their stock exchanges. Obviously, taking into account the magnitude of the potential market interruption, the possibility of disorderly adjustments in the future with adverse effects on world economic activity and financial stability cannot be ruled out.

Third, the operation of world markets can also be affected by a series of other factors, including geopolitical nature and / or the proliferation of protectionist trends. For example, despite the advances in negotiations between the United Kingdom and the European Union, uncertainty about the possible final result has not dissipated. In addition, the potential of problems in other countries or regions persists, such as North or Middle East Korea.

And we must add to this the possibility of additional actions aimed at obstructing commercial flows, particularly in the United States. In a strong appetite context for risk and a generally favorable economic perspective, emerging economies have continued to attract substantial capital flows. However, the materialization of the risks indicated above or others, such as the most serious economic difficulties in China, would harden external financial conditions for these economies and impact the prices of their assets, with more acute effects in those countries harassed bymost obvious vulnerabilities. Naturally, the recent evolution of the Mexican economy has been strongly influenced by the peculiarities of the external environment