MNI INTERVIEW: Rate Lags On Credit Back Gradual Easing - Mejia

Mexican credit markets react with a delay to interest rate moves, and the effects of past monetary tightening will continue to filter through and allow policymakers to keep adjusting policy gradually, deputy governor of the Central Bank of Mexico Omar Mejia, who has just co-authored a study on the subject, told MNI.

"Our study shows that credit responds with a lag to interest rate moves, and that the impact of monetary policy could be even greater given the economic weakness that began to emerge at the end of 2023. Thus, the lagged effect of the policy rate on credit adds to the impact that the economic slowdown itself would already have," Mejia said in an interview.

The paper "The Credit Channel in Mexico during the Post-Pandemic Period" was written together with Mauricio Torres, Jorge Jaramillo, and Jose Eduardo Valencia, all from Banxico, and was published in October of this year. Between 2022 and 2024, the period of focus for the research, Mexico's interest rate reached its peak of 11.25% yet the credit market remained dynamic, the authors found.  (See MNI INTERVIEW: Banxico Nearing End Of Easing Cycle - Zaga)

MONETARY POLICY WORKING

"At first glance, this behavior could be interpreted as evidence of the absence of the credit channel. However, in this study we argue that it is essential to consider the role of other factors, particularly the phase of the economic cycle," the official pointed out.

The authors found that the strength of monetary policy had not weakened, but that other factors, including prior economic growth, the post-pandemic credit rebound, and rising real wages, drove credit expansion.

Credit grew 6.2% on average in real terms from September 2022, when the monetary stance turned clearly restrictive, to March 2024, when the central bank made its first rate cut. Over the same period, consumer credit grew 10.7%.

"In the period we analyzed, credit showed strong expansion, but this was because the effect of increases in the policy rate was more than offset by the dynamism of economic activity. That does not mean the rate had no effect. Had the policy rate not been raised, there would have been effects on this and other channels that would have hindered the disinflation process," Mejia noted.

NEUTRAL RATE

Banxico cut its policy rate by 25 basis points to 7.25% last month. With this move, the ex-ante real rate stood at 3.36% and entered the board’s estimated range for the neutral rate, which goes from 1.8% to 3.6%, with a midpoint of 2.7%.

"The neutral rate is an unobservable variable, and its measurement is subject to considerable uncertainty. This reference must be interpreted in light of prevailing macroeconomic conditions and not only based on whether the rate crosses that threshold," Mejia said. He stressed that economic activity could amplify the credit channel.

"I consider it appropriate to assess the level of the monetary stance by taking into account various macroeconomic factors, which could indicate that monetary policy will indeed continue to influence the price-formation process, providing room to keep adjusting the policy rate with greater gradualism," he said.

"It is foreseeable that we will enter a period of moderate recovery, but the economy will continue to show wide slack throughout the forecast horizon," he added.

Mejia also emphasized that the weakness of the dollar mitigates the risk of depreciation of the Mexican peso. "And a medium-term factor is the significant increase in retirement savings resources, which will continue to grow, and this has a positive effect on the supply of loanable funds."