Mexico's fiscal deficit stands at 4.5% of GDP. Implementing an expansionary monetary policy when fiscal policy is also expansionary and inflation is on the rise is a monumental aberration. Currently, the Federal Funds Rate is at 3.75%, placing the Fed's rate in a neutral policy zone. In contrast, Mexico's central bank (Banxico) estimates the neutral rate to be between 1.7% and 3.3% in real terms. With inflation at 4.60%, this translates to a nominal annual rate of 7.2%. Therefore, the current rate of 6.75% indicates an expansionary monetary policy. It is crucial to note that the other arm of economic policy, fiscal policy, is also in a highly expansionary phase in both countries. The neutral rate is a theoretical concept representing the interest rate level that allows the economy to grow without generating inflationary pressures. For the US, the neutral rate was estimated at 1% real in 2022, equivalent to 3.7% nominal, given current inflation. The central bank's communication leaves the door open for further interest rate cuts. To understand the current monetary policy stance in both Mexico and the United States, it is essential to look at where their neutral rates are estimated. The decision to cut rates has generated significant criticism, especially as inflation in Mexico has been rising for several months. In the first half of March, general inflation rose to 4.63%—a deviation of 54% from the 3% target. The central bank's bulletin openly states that inflation has risen, expectations have increased, and the balance of risks is tilted to the upside. This decision is particularly questionable given the global rise in oil, gasoline, and fertilizer prices, and the instability in the Middle East, which has damaged hydrocarbon infrastructure.
