MNI INTERVIEW: Lower Rates With Disinflation- Banxico's Mejia

MNI (MEXICO CITY) - Banxico needs to reduce the level of monetary policy restriction given recent disinflationary progress, Central Bank of Mexico's Deputy Governor Omar Mejia told MNI, adding that excessively high interest rates for an extended period may cause distortions in markets and the economy.

"It is necessary to adjust the level of restriction," said Mejia in an interview at his offices in Mexico City.

"Excessively high interest rates for an extended period may cause distortions in markets and the economy. That's why gradualism in the ongoing disinflationary process reduces the costs of restrictive monetary policy for the economy.”

Earlier this month, Banxico cut its interest rate by 25 basis points to 10.75% in a split decision, with Governor Victoria Rodriguez and Deputy Governors Galia Borja and Mejia in favor of the rate cut, while Deputy Governors Irene Espinosa and Jonathan Heath voted to keep it at 11%.

Mejia said Banxico is considering several factors for the September decision and noted that while services inflation is proving more resilient, this is a worldwide phenomenon not necessarily correlated to cyclical conditions. "Some components in services inflation have shown higher persistence due to the lagged effects of pandemic-related shocks."

ACTIVITY VERSUS INFLATION

The Banxico deputy said he’s focused on how weakness in economic activity filters through to price pressures.

“This risk of weak activity is already materializing. We've had three quarters with growth below projections. I had already seen this coming, which is why my vote was dissenting to lower interest rates in June. The recent revision to the growth forecast released this week in our Quarterly Report confirms this downward risk to inflation,” he said.

“Central banks need to act in advance,” he added.

“A key element that opened the discussion for rate cuts in March, and is still relevant now, is the important progress in the disinflation process.”

Core inflation is on a consistent downward trajectory, he said, though one could argue this component is now decelerating more gradually. "But this is normal because it is approaching historical levels."

FORECASTS DIFFERENCE

According to the latest Banxico survey of private sector experts released Aug. 1, the market expects headline inflation to end this year at 4.58% and to end 2025 at 3.83%. The median forecasts for core inflation are 3.97% for 2024 and 3.71% for 2025, all above the 3% target.

Banxico expects 4.4% for this year and 3.0% by the end of 2025, while core inflation is expected to be 3.9% and 3.0%, respectively. (See MNI INTERVIEW: Banxico Easing Pause In Sight- Roldan)

"The difference between Banxico's projections for inflation and the market's arises from the role of interest rates in the modeling," Mejia explained. He added that a role particularly relevant for forecast-inflation-targeting central banks is to coordinate expectations and noted that both Banxico and market inflation projections show a "downward trajectory in the monetary policy forecast horizon."

Regarding whether there will be consensus in the next meeting, he said he couldn't speak for his colleagues.