La Jornada: BdeM will buy debt only to provide liquidity to the system, clarifies

The Bank of Mexico (BdeM) will purchase government securities with the aim of improving liquidity mechanisms in the financial system, the central agency reported; At the same time, he settled speculation that this mechanism involves financing the federal government “under the table” or a monetary flexibility program to stimulate the economy.

The BdeM has dedicated itself to operating the sale of government debt through auctions of instruments such as Cetes, M bonds, F bonds, udibonos and Brem, with the aim of regulating liquidity in the financial system. However, since June 15, it made modifications to the rules of the Monetary Regulation Bond auctions and announced that it would also begin to purchase government securities.

With the announcement of this instrument for purchasing government debt, speculation arose that this mechanism was a way to finance the federal government “under the table,” which has in the Ministry of Finance the task of reducing the public deficit, which in 2024 reached its highest level in three decades, before the credit profile deteriorates further due to the assessments of the risk rating agencies.

As part of this speculation, it was indicated that the measure implied a monetary stimulus program, known as quantitative easingwhich is used to stimulate a stagnant economy.

Last Friday, during a meeting to explain the auction program for the third quarter, and in which the Treasury, Petróleos Mexicanos and the Institute for the Protection of Bank Savings also participated, the central bank assured that the only objective of the measure is to count with greater precision the liquidity injected into the financial system, Finamex stated in a report to investors.

Yesterday, when addressing the issue, the central bank added that in the Government Securities Auction Program corresponding to each quarter it will announce the maximum amount of purchase operations that could be carried out in each period.

They will only be done when the liquidity conditions of the money market so require and their implementation “will depend exclusively on the forecasts regarding the behavior of liquidity and the prevailing conditions in the financial markets,” the BdeM stated.

This instrument would come into operation on August 17 and was limited to relatively short-term instruments, such as Cetes and F bonds, given that the minimum or maximum rates accepted in these operations are exactly the same as the target rate, currently at 6.5 percent, which would allow control over monetary policy and no pressure that deviates it from the desired level. Longer-term instruments, such as M bonds and udibonos, were ruled out.

Financial analysts consider that this mechanism is not emerging as a way to finance the federal government, which is prohibited by the Constitution. They consider that it will work as an extraordinary tool to inject liquidity into the financial system, not as a monetary stimulus.

“The risk that this measure becomes a mechanism to finance the federal government is relatively low. The first thing that should be noted is that there is a fundamental difference between accepting government securities as collateral in temporary liquidity operations and financing the public deficit,” explained Janneth Quiroz, director of Economic, Exchange and Stock Market Analysis at Grupo Monex.

If at some point the Bank of Mexico used these tools on a recurring basis to absorb large amounts of government debt or to keep interest rates on instruments issued by the government artificially low, then questions could arise about indirect monetization of the deficit, he explained in an interview.

Quiroz pointed out that the credibility of a central bank depends on whether it uses its powers “exclusively to fulfill its mandate of preserving price stability.” So, “in a context where public finances face significant pressures, any perception that the Bank of Mexico could blur the separation between monetary policy and fiscal policy could affect its credibility, raise risk premiums and make financing the entire economy more expensive,” he warned.