Banxico’s Heath warns rate cut sends wrong signal on inflation
The Bank of Mexico (Banxico) Deputy Governor Jonathan Heath said that the recent rate cut by the Mexican central bank “confuses and sends the wrong message” to financial markets and emphasized that the inflation risk is tilted to the upside, in an exclusive interview with Reuters.
Heath added that the recent rate cuts increase the risk that inflation might not converge to Banxico’s inflation goal of 3%, while providing forward guidance on holding rates for an extended period reduces the room for maneuver in the event of further tightening.
Key takeaways:
Says recent key rate cut “Confuses and sends the wrong message” as inflation is trending upwards
Recent rate cut hurts chances of seeing inflation converge to 3% target by end-2027
Guidance to hold rates steady for an extended period reduces room for maneuver, especially to the upside, which could be needed if inflation does not ease or the US Fed keeps raising its rate
If the US Fed hikes rates in coming meetings and rate differential between fed and Banxico falls below 200 basis points it would be “Dangerous and irresponsible”
Most important pending task is to understand in depth why bank has been unable to get inflation to converge to 3% and stay there.
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.
