By Anthony Esposito
MEXICO CITY (Reuters) – Mexico’s central bank governor, Alejandro Diaz de Leon, said in an interview on Thursday that collapsing commodity prices make it harder for emerging market countries to carry out the massive fiscal stimulus plans implemented in developed economies.
The Bank of Mexico, known locally as Banxico, unveiled around $31 billion in support for the financial system and cut borrowing costs on Tuesday in order to help the economy weather the coronavirus pandemic.
President Andres Manuel Lopez Obrador followed on Wednesday by saying the government will increase spending on social programs and infrastructure projects by $25.6 billion. The measure was criticized by some as too little, too late as it pales in comparison with stimulus packages in developed nations.
“The pressure emerging economies have felt due to falling commodity prices, in particular oil, that reduces the room to maneuver a little,” Diaz de Leon said, referring to the government’s debt and fiscal policy.
He underscored the importance of maintaining sustainable public finances but said Banxico was respectful of the government’s fiscal and debt policy strategy.
“Just as we expect and have received respect for the autonomy of the central bank to conduct monetary policy and use our instruments, we have the same respect for fiscal policy,” he said.
Banxico will hold its regularly scheduled monetary policy meeting on May 14 despite the out-of-cycle rate cut earlier this week and will continue to evaluate the situation and take actions it deems necessary, Diaz de Leon said.
The liquidity and credit moves the bank announced on Tuesday will support the functioning of the financial system with up to 750 billion pesos ($30.8 billion) in total. Coupled with previously announced measures, the support amounts to 3.3% of last year’s gross domestic product.
Diaz de Leon said access to credit is crucial for individuals, households and firms that have seen their income reduced, but it is highly unlikely big spending decisions will be made now despite the lower cost of financing after recent rate cuts.
“The challenge is to get through these months of the emergency in the best possible way and provide liquidity and financing to those who need it so when things return to normal” they can spend and invest, he said.
Earlier in the day, data from the national statistics agency showed consumer prices rose by 2.08% in the year through early April, its lowest level in more than four years and below Banxico’s target of 3%.
Diaz de Leon said in the short term lower energy prices and in the medium term greater economic slack could exert downward pressure on inflation. Upward pressure could be exerted by short-term supply issues with certain goods and in the medium term by foreign exchange pressures.
“In the near term, fuel is clearly the dominant (factor) on headline inflation,” he said.
(Reporting by Anthony Esposito; Editing by Julia Love and Leslie Adler)
