Impacts of the Fed on Mexico

For the second time in a decade, the Federal Reserve of the United States (the central bank, known as the “Fed”) has raised the interest rate by 0.25 percent, a modest rise for the U.S. economy, but one which could have undesirable impacts on our [Mexico’s] economy. Certainly, the Bank of Mexico anticipated that move almost a month ago, when it raised the interest rate to 5.25 percent. However, that may turn out to be inadequate, especially if the cost of capital north of the Rio Grande continues to rise, the way U.S. President-elect Donald Trump wants it to.

At first glance, the interest rate differential (0.75 percent there and 5.25 percent here) should be big enough to retain capital in the Mexican economy and avoid a decline in investment. However, because of the obvious asymmetries between the two countries, it’s not possible to be certain about this; on the contrary, interest rate hikes in the U.S. constitute a disincentive to consumption and investment in our country. This is because the uncertainty about the decisions Trump will have to make next month, when he takes office as president, paradoxically weighs more on the financial indicators in Mexico than in the United States, given the catastrophic potential damages that could result from a sharp drop in bilateral trade and a mass deportation of Mexican immigrants.

In terms of daily life, the moves by the Fed and the Bank of Mexico imply that mortgages, car loans and consumer credit will, predictably, become more expensive. This could negatively impact the underlying sectors and industries, and present more difficulties for the needed economic recovery, and could as well cause serious problems for debtors and for companies that depend on imports for all or a significant part of their business.

On the other hand, in light of the factors holding back the revitalization of the Mexican economy, there still has not been a solid and wide-ranging response by the authorities. Significantly, the 2017 Mexican Federal Budget, approved a few days before the U.S. presidential election, didn’t take into account the need to face possible large-scale adjustments, nor the possibility that the government may have to make up, through public spending, for an eventual shortfall in investment by foreign and domestic companies.

In this context of uncertainty, individuals and corporations are advised to act with extreme caution, above all in borrowing. A rise in interest rates, which can’t be ruled out, could put many in danger of insolvency and bankruptcy.

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