# Inflation & Interest rates



## eastwind (Jun 18, 2016)

Mexico's central bank raised rates again, they now stand at 7.0% for overnight bank lending. Consumer price inflation was measured at 6.3% (annual rates). The forex market was expecting this, so the MXN strengthened both before and then further after the announcement, to 18.03 per USD.

Here's a not-very-good article where I got the numbers: Peso Strengthens After Banxico Hikes Rates For 7th Time In A Row Amid Soaring Inflation | Zero Hedge

On Saturday they raised my local bus fare into town from 10.5 to 12 pesos - a 14% increase! But I'm told it's the first increase in 3 years, so that's actually less than 6.3%/yr. I'm kind of glad to not have to deal with the .50 peso piece any more, but for the people who earn their pesos one little tip at a time it's got to hurt. I'm surprised that it took this long for gasolinazo to filter through to the bus fares.


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## horseshoe846 (Feb 8, 2017)

eastwind said:


> Mexico's central bank raised rates again, they now stand at 7.0% for overnight bank lending. Consumer price inflation was measured at 6.3% (annual rates). The forex market was expecting this, so the MXN strengthened both before and then further after the announcement, to 18.03 per USD.
> 
> Here's a not-very-good article where I got the numbers: Peso Strengthens After Banxico Hikes Rates For 7th Time In A Row Amid Soaring Inflation | Zero Hedge
> 
> On Saturday they raised my local bus fare into town from 10.5 to 12 pesos - a 14% increase! But I'm told it's the first increase in 3 years, so that's actually less than 6.3%/yr. I'm kind of glad to not have to deal with the .50 peso piece any more, but for the people who earn their pesos one little tip at a time it's got to hurt. I'm surprised that it took this long for gasolinazo to filter through to the bus fares.


I used to like zerohedge a lot - but after understanding the people behind it - I pay it very little mind. They are not what they once were.

Inflation is a funny thing. When we lived in the US our largest expenses were probably (exempting federal taxes) : medical, property taxes, auto insurance, groceries, home insurance, dining...

Here in Mexico : IMSS went up a small bit this year, I think our property taxes actually went down a little, I think our auto insurance/home insurance stayed the same, dining has gone up a little. Pemex is a little more. Now groceries - if you shop exclusively at Costco - you might be feeling a pinch - particularly with that nice USDA choice steaks we have enjoyed.

In checking my Cetes account - the average we are earning is 6.45%. But the best (1 year) CETE we have is earning 7.25%. How does that compare to the 'average' retiree in the US with their money in a money market account ?


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## RickS (Aug 6, 2009)

_"How does that compare to the 'average' retiree in the US with their money in a money market account ?"_

I think that you know the answer and are just rubbing it in! :

Is the CETE similar to a zero-coupon bond? 

If you don't mind me asking, how long have you been 'investing' in them and how have they fared over time?


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## UrbanMan (Jun 18, 2015)

Obvious comment on investing in peso-denominated interest bearing instruments .... currency risk. 

And don't say it does not impact you if the peso has a mini crash, because your daily spending is in pesos. Economics 101, it does affect you.


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## eastwind (Jun 18, 2016)

I don't know anything about who's behind zerohedge. They seem like a bunch of gold-bug sky-is-falling dig-your-nuke-bunker-now types and I don't pay them much mind. They put up some useful data from time to time, and if they stop telling me the end of the world is imminent that will mean all the bears have capitulated and it's time to sell.

As far as CDs, you have to compare real rates, not nominal rates. If inflation is 6.3% and you're getting 6.45% then your real rate of return is .15%. In the US it's a little harder to know if the published CPI rate is accurate - many people have argued for quite a while that it understates actual inflation. But even assuming it's the accurate rate, I think a real return of 0.15% on a CD (you didn't say the term) is probably better than you can get in the US right now, comparing real rates to real rates.

What is the risk, though, that inflation in Mexico will suddenly spike to, say, 8.3%? What is the risk that the US inflation will suddenly increase by 2%? I think the risk of being tied up in a longer-term CD while inflation moves against you and your real return becomes negative is much greater in pesos. 

Also, even if you plan to spend the pesos that you have in Mexican CDs here in Mexico, you can't ignore the effect of exchange rates when comparing investments - because you have the alternative to leave the money in dollars and exchange it for pesos later. Whether you lock in your exchange rate now (and hold the money in pesos until you spend it) or exchange later when you need to spend the money will make a difference, and it's a risk either way, the peso could be higher or lower later on. But you're not eliminating that risk, you're just choosing which way to take the risk. 

If the US didn't have so many FATCA and FINRE rules, I might want to keep about half a year's expenses here in pesos and continuously replenish it. That way if the peso suddenly gets really strong I can just draw down on that buffer of money and hope it's a temporary thing. But I wouldn't lock the money up in a six month CD, that would defeat the purpose of it as a buffer.


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## horseshoe846 (Feb 8, 2017)

RickS said:


> _"How does that compare to the 'average' retiree in the US with their money in a money market account ?"_
> 
> I think that you know the answer and are just rubbing it in! :
> 
> ...


I'm not trying to rub anything in - honest. And I am not trying to influence what you do with your money. We have more than perhaps a third of our monies sitting in money market like accounts in the US. The next third is in 'high quality' corporate bonds. Perhaps a third of our monies are in Mexico.

A CETE is like a short term government CD which are auctioned every Tuesday - and which you can buy directly from the Bank of Mexico. When you buy them from a Mexican bank you give them perhaps 1% commission. 

Sr Carstens - the current head of the Mexican 'Fed' is about to take over the role of head of the Bank of International Settlements. I think some people must think he knows what he is doing. But what do I know...


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## UrbanMan (Jun 18, 2015)

horseshoe846 said:


> In checking my Cetes account - the average we are earning is 6.45%. But the best (1 year) CETE we have is earning 7.25%. How does that compare to the 'average' retiree in the US with their money in a money market account ?


Probably an okay thing to so with some of your money. Year to date, the peso has actually strengthened versus the USD (or the USD has weakened, depending on your point of view). 



horseshoe846 said:


> Sr Carstens - the current head of the Mexican 'Fed' is about to take over the role of head of the Bank of International Settlements. I think some people must think he knows what he is doing. But what do I know...


In the US, I think Yellen is viewed as being smart and generally making the right moves. The rest of the government (Federal) on the other hand, is in a state of chaos.


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## rohbear (Feb 28, 2017)

There are so many variables, from currency exchange rates, to 2 different inflation rates, to varying rates of return on investments, and don't forget the different tax rules each country has. I'm not an economist, hell I never even took Economics in school. I figure, I'm unable to figure out what financial wizards are doing, and they affect the markets without me even knowing it. I'm going to just pull my money out as I need it and hope for the best!


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## eastwind (Jun 18, 2016)

For people who are intent on holding their investment money at a bank, either in Mexico or the US, be aware when sitting down and picking your investment with the banker, there is a huge difference between putting the money in a CD and a bond offered by that bank. 

In Italy, many bank customers were encouraged to buy junior bonds in the banks instead of CDs. Bonds are *not* insured like CDs are, and if the bank becomes insolvent (goes bust) you could lose your entire investment. 

Two banks in Italy went bust this last Friday and depositors own about 100 million euros of junior bonds in those banks. A depositor enticed into buying a 10,000 euro bond in one of those banks, if they tried to sell it today would receive only 100 to 300 euros of their investment back. They're still working out the details of the "wind up", which is why the junior bonds still have some value. By tomorrow it is most likely those bonds will be completely worthless. However the regular depositors at those banks, including people who bought CDs will most likely be 100% protected, as long as their accounts were not too large.

Some sleazy bankers simply don't have your best interests in mind, they are only trying to sell you an investment that benefits their bank and them. They may try to confuse you with multiple offers. Keep asking "which of these investments are insured? Which of these investments can lose value?" One tactic is to talk you to death, get everything nearly settled, then at the last minute say "Oh, there's this other option that pays higher interest" and switch you to something they haven't mentioned before - and about which you have not asked those critical questions.

Always be aware of the difference between a nice man in a suit and a man in a nice suit.


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## eastwind (Jun 18, 2016)

Well in this case the junior bondholders got bailed out, so the situation didn't turn out as dire as my above post indicated. The Italian taxpayers are on the hook for up to 17B euros. By ECB rules, the junior bondholders should only get 80% of their money back, at most, but the Italians fudged the rules.
Anybody who gambled and bought the bonds at .03 on the euro made a killing, and anyone who sold is devastated. The failed backs are now part of Intesa, another bank.


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