Higher Rates Could Lead to Possible Recession

The likelihood of a US recession continues to increase and calls into question how it will affect Mexico. The US economic cycle has a strong influence in Mexico’s economy, making the risk undeniable. However, Mexico could avoid a recession because some of its industrial sectors have performed better than those in other regions in the world. 

In July, the US Federal Reserve (Fed) is expected to repeat the 75 base point hike it did in June 2022. Banxico is expected to follow suit during its next meeting in August, making the policy rate peak at 9.50 percent in this cycle. This move could have direct repercussions in Mexico’s economy, as previously reported by MBN. Repercussions include a depreciation of the Mexican peso, which went down by 1.41 percent, according to Banxico data.

However, data from HSBC, INVEX and Citibanamex analysts shows that the most likely scenario that can be expected “is that the Mexican economy will have a slowdown rather than a contraction into recessionary territory,” reports Bloomberg. This scenario could be observed as certain economic sectors continue to recover. If they continue to grow, they would help to maintain positive activities. Mexico is also seeing a growing influx of remittances and numerous opportunities brought about by nearshoring.

Global investment management firm BlackRock warns that the further increase of interest rates by Banxico would impact Mexico’s economic growth. Central banks expect that inflation will peak at the end of 3Q22 and that from there, they will begin to see lower levels that will give Banxico room to lower rates, reports BlackRock. Moreover, the increase in interest rates by central banks has not been as successful as expected. “When Central Banks start to realize that they cannot contain inflation without having a major impact on economic growth, then we will see a change in rhetoric, but until then, we do not think they are necessarily successful in containing inflation,” said Jose Luis Ortega, Head of the Debt and Multi-asset Teams, BlackRock. In the current economic situation, central banks are anchoring inflation by increasing rates, but to achieve this “it is necessary to raise them considerably, which will reduce the demand for resources and will put a very important brake on economic growth,” added Ortega.