MNI INTERVIEW: Banxico Should Have Begun Easing In '23-Werner

Mexico's Central Bank is falling behind the curve because it should have started reducing its interest rates in the second half of 2023, former director of economic studies at Banxico, Alejandro Werner, told MNI, adding the monetary authority's decision not to depict the 25-basis-point cut in March as the start of a new easing cycle was unduly hawkish.

"There was space to loosen earlier. The board decided to reduce rates some weeks ago and only did it by 25 basis points, and did not mention that this was the initial phase of the easing cycle. Also, not all the board members voted for this very tiny reduction in interest rates," said the former official, now a director of the Georgetown Americas Institute and non-resident senior fellow at the Peterson Institute for International Economics (PIIE), in an interview.

"Reducing rates by 25 basis points when you're at 11% doesn't make any sense if it's not the initial step."

The statement accompanying the last decision predicts inflation will reach the 3% target in the second quarter of 2025 and yet offers little guidance on how monetary policy will adjust accordingly. (See MNI INTERVIEW: Banxico Unlikely To Cut Every Meeting - Soriano)

The former official said that if Banxico is expecting inflation to reach the target in the second quarter of 2025, interest rates should ideally be close to neutral by then. "According to Banxico, and maybe this is also a little bit exaggerated, the neutral rate is 5.5%. If you're at 11%, you're 550 basis points above neutral," he said.

MORE AGGRESSIVE

Werner, who also served as undersecretary of finance and public credit, director of economic policy, and chief of staff at the Finance Ministry of Mexico, said that even if the board wants to stay above the neutral rate, when inflation reaches 3%, it will be necessary to reduce aggressively by then. (See MNI INTERVIEW: Banxico Declared Victory Too Soon - Alatorre)

For him, the central bank's caution is unjustified as core and headline inflation for Mexico are not much higher than in other Latin American countries.

"After the (presidential) election in June, hopefully, they will signal very clearly that interest rates should continue to go down a little bit more aggressively. And then they can do another pause when interest rates are at 8.50% and see how the economy adapts to them and how inflation is behaving," he said.

STRONG PESO

The former Banxico director said there are strong signals from structural factors supporting the Mexican peso, especially strong external accounts, but added that a bit of currency weakening could bolster growth.

"The economy could be doing better with a slightly weaker peso. As the economy starts to slow down in the second half of this year, hopefully Banxico will also see that a combination of lower rates and slightly weaker exchange rate is good for the Mexican economy."