EconomyThe severe drought in Mexico prompted Banxico to raise...

The severe drought in Mexico prompted Banxico to raise its interest rates

The worst drought in decades, according to NASA, was one of the inflation risks observed by the members of the Governing Board of Banco de México (Banxico), and influenced the decision to increase the interest rate by 25 basis points. of reference, to leave it in 4.25%.

It was the only new element that the central bank included in inflation risks, the day it raised borrowing costs for the first time since 2018. The drought was able to persuade policymakers to go “hawkish,” the deputy governor said. from Banxico, Gerardo Esquivel, in an interview.

The drought “is possibly now part of the shocks that we are seeing that is affecting inflation,” Esquivel told Bloomberg News after the bank’s benchmark interest rate hike on June 24.

Central banks around the world are weighing the extent to which environmental events affect their stances on interest rates.

For example, the chairman of the United States Federal Reserve (Fed), Jerome Powell, has insisted that climate change was not a primary factor in the making of monetary policy, a view questioned by his European counterparts. In Brazil, the worst water crisis in nearly a century has helped drive inflation above 8%, the highest in five years, which partly explains recent rate hikes in Latin America’s largest economy.

Low levels of reservoirs

The drought in Mexico affects about 80% of the country, the northwestern states are among the most affected, such as the tomato producer Sinaloa, but also Jalisco, where cattle are raised, which has triggered the prices of agricultural products. Reservoirs in eight of the country’s 32 states are below 10% storage, according to the National Water Commission (Conagua).

When announcing the annual inflation level in Mexico of 6.02% for the first half of June, information from the statistics institute said that the highest price increases were seen in energy and livestock activity.

Meanwhile, agricultural prices helped drive this annual increase, surprising economists who expected inflation to slow down. Fruits and vegetables, led by tomatoes, had the greatest impact on the increase.

Banxico reacted by increasing borrowing costs by a quarter of a point, to 4.25%, in a split decision, something that none of the 23 economists surveyed by Bloomberg expected.

“Supply chains and production processes of various goods and services continue to be affected by the pandemic,” the central bank said in its statement announcing the increase. “This has caused additional shocks to those expected in headline and core inflation.”

Another member of the central bank board, Irene Espinosa, told Bloomberg News in May that rising fresh food prices demonstrate that policymakers have a role to play in sustaining financing and reducing costs. risks of climate change. This can snowball into higher inflationary pressures, he said at the time.

Future movements

Esquivel also warned that climate change could make price swings more erratic in the future. But the central banker, who is widely seen as a supporter of expansionary policy because he has participated in minority votes to cut rates, said he questioned whether monetary policy is the right way to combat droughts.

In its inflation basket, Mexico gives food a higher weight than many other countries, including Argentina and Brazil, because high levels of inequality increase the importance of food prices, Esquivel said. Therefore, while the Fed has said that weather events will not directly affect monetary policy, Mexico has made no such commitment, he explained.

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The drought in Mexico, which coincides with a heat wave that is brewing in the northwestern United States, has led authorities to stimulate rain in Sinaloa, Sonora and Chihuahua with reagents that are distributed in the clouds. The three-month plan involves the overflight of planes in an area of two million hectares in each state, the government reported in a statement.

However, according to Judith Domínguez Serrano, professor-researcher at the Center for Demographic, Urban and Environmental Studies of El Colegio de México, this measure and the efforts to transport water in pipes to the most affected areas are not enough, and the country needs to take more drastic preventive measures.

Droughts are becoming “more frequent, more intense,” he said. “What can lead to a chain is that not only do animals die, but there are also social conflicts.

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