The Mexican central bank’s weekly financial statement is rarely the most scintillating document Banxico, as the bank is more commonly known, produces. But the latest bulletin stands out for its confirmation that the country’s international reserves have just surpassed $100bn for the first time.
In many ways, this is hardly surprising. Ever since 2008, when the US financial crisis hit Mexico, the country’s monetary authorities have been accumulating reserves as a way of ensuring plenty of wiggle room in the event of further and future external shocks. And it is right to do so.
But with reserves now at record levels, and with no sign that the policy of accumulation is going to change any time soon, it is worth remembering that it comes with a price tag.
For every dollar the central bank receives, it pays out the equivalent in Mexican pesos. But because it decides to keep that dollar – in fact, the bank’s international reserves are in several currencies but the mix is not public information – the bank must “sterilise” the pesos it pays out by issuing bonds in the domestic market. This bond issuance absorbs the pesos paid out, thus reducing or eliminating what could otherwise be a worrying source of inflation.
The problem for the bank is that the interest rate it offers on those bonds is considerably higher than the rate it gets from investing its dollar reserves in US Treasury bills. The result is not just an opportunity cost but a real cost the bank must pay every year. In his daily column for Mexico’s Reforma newspaper, Enrique Quintana estimates that the cost this year could be more than $4bn this year.
Today’s news that inflation during the first two weeks of June fell 0.04 per cent, bringing inflation over the last 12 months to 3.7 per cent, will reduce pressure on the bank to carry out its sterilisation operations.
But few believe the benign inflationary environment will last too long, in particular because it has a lot to do with transitory factors such as low food prices from good harvests and lower electricity prices from government subsidies offered during the hot summer months.
For now, most economists consider the cost to the central bank to be well worth the peace of mind that having such high reserves affords. But the longer the policy lasts – the bank could easily accumulate another $15bn in international reserves in the coming months – the more the bank should ask itself whether the benefits outweigh the costs.