Banxico’s Heath says rate cuts can wait as core inflation persists
The Bank of Mexico (Banxico) Deputy Governor Jonathan Heath said that the central bank can wait to reduce interest rates, signaling that further easing is possible but in about a year or more, as he qualified the current monetary policy stance as “appropriate.”
In a podcast with Banorte, Heath said: “I think where we are now, it is appropriate to stop,” adding that the only way to cut is if core inflation converges to Banxico’s 3% goal.
Even though the disinflation process progressed, Heath warned that it is too soon to declare victory, because headline inflation dropped mainly due to non-core components, which are volatile and less influenced by the central bank’s policy.
He recognized that persistent inflation stems from service inflation and sees inflation risks tilted to the upside.
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.
