EconomyInflation and interest rates, main concerns of the global...

Inflation and interest rates, main concerns of the global market

Economic growth has become a feat that today seems distant, since the expectations for a better horizon are seen until 2023. However, at the end of the tunnel, options can be found that give peace of mind and opportunities to investors and, at the same time, At the same time, reduce the damage to your assets despite the difficult environment.

Within the framework of the Expansión Summit 2022, in the panel “Certainty in times of change and volatility” , specialists discussed the main factors that could affect the course of the world economy next year.

For the moment, the markets have already discounted the increase of 75 basis points in the interest rate of the Federal Reserve of the United States, after the publication of inflation on Tuesday, which pointed to its second month down (8.3% in August). The data reinforces expectations that the federal funds rate will rise to 4.25%, which fuels concerns about the US recession. But what would it imply in terms of financial conditions?

“As we well know, the US central bank is immersed in a monetary tightening that began towards the end of last year, in terms of the withdrawal of part of the liquidity pumped during the pandemic and in 2021. At the beginning of this year through the The interest rate has risen constantly and the normalization is due to the error of perception that all the central banks of the world had of seeing the inflationary phenomenon as transitory”, mentioned Alfredo Coutiño, director for Latin America of Moody’s Analytics.

The director of Moody’s explained that the data on the drop in inflation in the United States has been mainly due to the drop in fuel prices. However, in core inflation it is observed that it rose and that is where the central banks pay special attention.

Gabriela Siller, Director of Economic Analysis at Grupo Financiero BASE , recognized that inflation is currently the great global problem, in addition to the fact that it is more than proven that it is not transitory, as she explained that it is pressured by disruptions in supply chains, the war in Ukraine and excess liquidity globally.

“In the US I think that inflation has started to ease a bit, obviously not as fast as the markets would like. Maybe this year if they continue with a monthly inflation of around 0.6%, they could close the year at 7.9%”, commented Siller.

In the case of Mexico, Siller said that inflation has not reached a ceiling, because gasoline prices are artificially low due to government subsidies.

The economist Luis de la Calle considered that all issues are related: inflation, interest rates and economic performance. Monetary policy will have an economic impact in Mexico and the only antidote is to gain market share in the US so that the impact is less.

“It is to create a situation where we are more attractive to direct investment. This is not necessarily clear, since what the United States is asking us is not so much to solve the specific problems that a company has that has not been given a permit, but the heart of the complaint is to ensure that Mexico is going to treat Canadian and American companies exactly the same as the Federal Electricity Commission (CFE)”, added De la Calle.

This issue of consultations is important, De la Calle said, because if there were a solid solution, Mexico’s attractiveness to investment would be significantly improved and it could take advantage of environmental change and the US initiative to build semiconductors (which require clean energy production).

Coutiño explained that the markets are betting that this recession could start early next year, when the federal funds interest rate is already in restrictive territory. The market consensus indicates that it could end this year at 4%, in nominal terms, a level well above the estimated rate of neutrality.

Analysts agreed that the main fear is a greater monetary tightening that exceeds that reported by inflationary conditions, that is, there could be more uncertainty, if the monetary authorities in the US go beyond what is needed.

Some of the risks that were identified in the panel come from the real economy and also from the uncertainty and volatility in the financial markets, which could ultimately translate into an economic crisis.

What are the margins of maneuver in Mexico?

The room for maneuver that economic policy can have in Mexico must be created, starting with fiscal policy, since one of the risks that has begun to develop is a disarrangement of public finances. The government has a budget constraint and a large part of the surplus, due to high oil prices, has vanished in recent weeks to finance spending on social programs and the gasoline subsidy.

“That is not sustainable, because the price of oil is already going down, revenues from oil exports will also be adjusted downwards and the government will remain stuck in the trap it generated and it will be difficult to stop it suddenly, unless it implements cuts in public spending in a brutal manner and that leads us to the episodes of instability of the past”, explained Alfredo Coutiño, director for Latin America at Moody’s Analytics.

The foregoing would lead the markets to activate the alerts and begin to reconsider how convenient it is to continue in the Mexican market.

In monetary policy, everything will depend on inflation, if it does not give in, no matter how much the Bank of Mexico wants to accelerate the pace of interest rates, it will force the economy and introduce a very important risk in the national financial markets and that instability will hit the exchange market.

The director of Economic Analysis of Banco Base agreed that fiscal problems are the main factor that could lead to the generation of a long-term crisis for Mexico. With the economic package of 2023, a 28.5% higher indebtedness was announced, in addition to “very happy” expectations in economic growth (of 3%). In the event of not reaching these goals, the markets could become more uncertain and therefore investors would be scared away.

Luis de la Calle concluded that what is coming is an important impact on the conditions of monetary policies at a global level and, therefore, will have an impact on Mexico. Therefore, the only way to avoid an unfavorable scenario for Mexico is to do things correctly. “We are no longer going to have the pretext that inflation is imported, because when all the bankers in the world say that inflation is imported, someone is lying. In fact, with this they are validating the inflation rate”, said De la Calle.

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