By Anthony Esposito

MEXICO CITY (Reuters – The unexpected shakeup of Mexican President Andres Manual Lopez Obrador’s nomination process to the Bank of Mexico’s next chief has cast doubt on the bank’s rate tightening cycle, which it is trying to maintain high inflation.

Lopez Obrador (a leftist populist who had already appointed three of Banxico’s five board members), rescinded the candidature for Arturo Herrera, former Finance Minister. Victoria Rodriguez, an unrecognized senior member of the finance ministry, was instead suggested to be the first woman bank chief.

Mexico’s currency suffered from the news. It lost as much as 22% to 21.6070 USD on Wednesday. This was its lowest level since March 8. However, it has begun to recover some of its losses.

Some analysts felt the move was a breach of Banxico’s independence despite Lopez Obrador promising that there would not be government intervention in Banxico’s decision-making process

Alberto Ramos, Goldman Sachs (NYSE) economist said that “the uncertainty caused by this development also is highly inopportune since the central bank struggles to get a grip of inflation and amidst drifting expectations.”

The annual inflation rate rose quicker than anticipated in November’s first half to over 7%. This is the highest inflation rate for more than 20 years and nearly double Banxico’s target inflation of 3% plus/minus one percentage point.

Banxico increased its benchmark rate of interest by 25 basis point on November 11. This was the fourth consecutive policy meeting. It now stands at 5.00%.

Rodriguez will succeed Alejandro Diaz de Leon as Governor, who’s term ends in 2021. The Mexican Senate must ratify her nomination due to Rodriguez’s majority.

Analyst Rodriguez believes Banxico would be more optimistic.

The five-member board of directors will be independent, but more dovish. “We need to remember that many EMs, especially advanced economies, already have dovish central bank waiting for inflationary shocks.

Despite the inflationary pressures, Banxico will likely continue to raise rates.

Nikhil Sanghani (Latin America economist, Capital Economics) said that “we doubt this appointment alters [the picture] for monetary policy.”

Sanghani predicted that Banxico will continue to tighten its belt with four additional 25-basis points rate increases up to 6.00% in mid-2022.

Sanghani stated that the key danger to his view was if the peso is put under more pressure. This could lead to more aggressive tightening even under a less dovish board next years.