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Mexican Central Bank Signals Steady Rate Strategy Amid Economic Pressure


Benjamin Hughes

April 20, 2024 - 15:22 pm


Anticipated Consensus for Steady Mexican Interest Rates in May

In a recent interview during the annual International Monetary Fund meetings in Washington DC, Jonathan Heath, Deputy Governor of the Bank of Mexico (Banxico), discussed the possibility of Mexico's central bank holding borrowing costs at current levels. The next meeting in May is expected to see a unanimous vote to maintain the benchmark interest rate at 11%. Banxico considers their March rate cut as an initial adjustment rather than an indication of rapid policy normalization.

Heath expressed a cautious approach, favoring a break in May to assess data development by June. The economic landscape, according to Heath, remains consistent with the board's perspective from the March rate decision when they opted for a quarter-point reduction. However, further immediate cuts were not projected. Stating it plainly, Heath remarked, "Just because we cut in March it doesn't mean we formally began a process of rate drops."

Jonathan Heath, deputy governor of Bank of Mexico (Banxico) Jonathan Heath, deputy governor of Bank of Mexico (Banxico), Photographer: Alejandra Rajal/Bloomberg

Banxico's first post-pandemic rate reduction occurred last month, following other major inflation-targeting central banks in Latin America. The declaration suggested that subsequent decreases, if any, would be measured and intentional. Consumer price inflation has receded to 4.42% year-on-year, and core inflation, excluding volatile items such as energy and food, is also on the decline. Despite these favorable conditions, many investors hold back expectations for extended easing, especially as the Federal Reserve takes a more tentative stance towards its own rate cuts.

Heath explains that Mexico is not embarking on a cycle of rate reductions but instead made a "needed fine tuning" to maintain the appropriate level of monetary restriction. Heath envisions an ideal interest rate range should be between 7% and 7.5% upon adjustment for future inflation expectations. If rates climb above this range, there might be some room for another modest quarter-point adjustment.

Emphasizing his position, Heath clarified, "That is my personal range, no one in the board put a number and it's not set in stone. I'm just a numbers guy." The dynamic between Mexico's benchmark lending rates and those of the Federal Reserve is closely monitored to evade capital outflows, yet Banxico board members have consistently maintained that their decisions are made independently.

The Federal Reserve Chair, Jerome Powell recently indicated a shift towards a longer wait period than originally thought, to reduce interest rates given the continuing high inflation figures. Nonetheless, according to Heath, Mexico's rate decisions for May and June will be autonomous of the Federal Reserve, even though Banxico is maintaining an acceptable rate differential with the US.

Mexico's policymakers decided on a split vote to trim rates by a quarter-point to 11% from a historic peak last month. Specifically, Irene Espinosa, one board member, opted to maintain borrowing costs, pointing out the additional challenges faced by monetary policy, including wage pressures and expansionary fiscal policy. Espinosa, in a separate discussion with Bloomberg News, mentioned that Mexico isn't at the start of an extended easing phase. After the May meeting, Heath foresees a potential divide in decisions. However, there is consensus on the board that when the normalization process begins, it will proceed with cautious and steady rate decreases. "No one is thinking of drops bigger than 25 basis points, as far as I can tell," he stated.

The economic growth in Latin America's second-largest economy, Mexico, has been gaining momentum through the process of near-shoring. This economic strategy involves businesses establishing local operations to cater to clients across the North American region. President Andres Manuel Lopez Obrador is also amplifying government spending in the final months of his administration, leading to the largest budget deficit seen since the 1980s. Such developments, while bolstering growth, are simultaneously stirring inflation concerns among the central bank officials and private-sector economists in Mexico. Projections indicate consumer price increases will hold above the target of 3% all the way through to 2025.

Banxico is aspiring to witness a consistent downtrend in consumer price increases, particularly a break in the resilience of services inflation. "We believe we are close, but we need to see costs of services in a clear downward tendency," Heath mentioned, emphasizing the need for such a trend to be apparent before considering further policy adjustments.

In conclusion, Mexico's economic prospects are tinged with caution as the central bank weighs its options. With inflation slowly easing and global fiscal policies in flux, the coming months will likely be characterized by a careful balancing act. The central bank's inclination to pause rate adjustments will be closely examined as data emerges, and decisions are made independently of the Federal Reserve's actions. As Deputy Governor Heath succinctly puts it, Banxico is focused on maintaining just the right level of restrictiveness in its monetary policy while keeping a mindful watch on inflation trends and international economic currents.

This detailed analysis of Mexico's current monetary policy challenges has been offered with assistance from Maya Averbuch.

For further information and to view images related to this news piece, visit BNN Bloomberg.

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