Banxico Deputy Governor urges caution on rate cuts amid sticky inflation
Banco de Mexico (Banxico) Deputy Governor Jonathan Heath crossed the newswires in a podcast by Grupo Financiero Banorte on Wednesday. He reiterated the central bank should be more cautious in cutting interest rates, given the scenario of sticky core inflation, and headline inflation remaining above target.
Banxico had cut rates for ten consecutive meetings, including the September 25 reunion, in which the bank slashed rates 25 basis points, on a 4-1 vote split, with Heath voting to hold rates.
Heath said, “The inflation target is not below 4%. The inflation target we have is specific, it's 3%. The plus or minus 1% range is a range of variability ... The fact that inflation is just under 4% is irrelevant; we are not meeting the inflation target.”
He observed that continued increases in labor costs and internation food prices are slowing inflation convergence towards Banxico’s 3% goal. Regarding core inflation which rose to 4.28% in September, said that is “showing no sign that it wants to go down.”
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Banxico FAQs
The Bank of Mexico, also known as Banxico, is the country’s central bank. Its mission is to preserve the value of Mexico’s currency, the Mexican Peso (MXN), and to set the monetary policy. To this end, its main objective is to maintain low and stable inflation within target levels – at or close to its target of 3%, the midpoint in a tolerance band of between 2% and 4%.
The main tool of the Banxico to guide monetary policy is by setting interest rates. When inflation is above target, the bank will attempt to tame it by raising rates, making it more expensive for households and businesses to borrow money and thus cooling the economy. Higher interest rates are generally positive for the Mexican Peso (MXN) as they lead to higher yields, making the country a more attractive place for investors. On the contrary, lower interest rates tend to weaken MXN. The rate differential with the USD, or how the Banxico is expected to set interest rates compared with the US Federal Reserve (Fed), is a key factor.
Banxico meets eight times a year, and its monetary policy is greatly influenced by decisions of the US Federal Reserve (Fed). Therefore, the central bank’s decision-making committee usually gathers a week after the Fed. In doing so, Banxico reacts and sometimes anticipates monetary policy measures set by the Federal Reserve. For example, after the Covid-19 pandemic, before the Fed raised rates, Banxico did it first in an attempt to diminish the chances of a substantial depreciation of the Mexican Peso (MXN) and to prevent capital outflows that could destabilize the country.
Author
Christian Borjon Valencia
FXStreet
Markets analyst, news editor, and trading instructor with over 14 years of experience across FX, commodities, US equity indices, and global macro markets.
