MNI INTERVIEW: Trump Means Banxico Must Be Cautious -Heath
MNI (BRASILIA) - The Central Bank of Mexico needs to exercise caution in setting rates given the risk of U.S. tariffs, which, if they materialize, could affect future monetary policy decisions, said Banxico Deputy Governor Jonathan Heath, who dissented in favor of a smaller rate cut at the February meeting.
"This year will be full of challenges and risks. I agree with the rate-cutting cycle for our target rate, but I would prefer that we proceed with a bit more caution at this time," Heath said in an email to MNI earlier this week after being asked whether he could maintain his position at the next meeting. (See MNI INTERVIEW2 -Banxico Optimistic On Non-Core Inflation-Heath)
Banxico accelerated the pace of interest rate cuts at its February meeting, reducing its overnight interbank benchmark by 50 basis points to 9.50%, and signaled similar cuts at upcoming meetings, though Heath dissented in favor of a smaller 25bp cut.
"When I say that this year will be full of challenges and risks, I am specifically referring to the Trump factor. So far, we have considered tariffs and other threats from the United States merely as risks that, if materialized, could later prompt changes in our decisions," he said. (See MNI INTERVIEW: Banxico Set For Larger Cut That Poses Risks)
Mexico is awaiting the results of a month of negotiations to see if Trump’s earlier threatened 25% tariff on goods from the country ends up being imposed. The U.S. has also slapped 25% tariffs on steel and aluminum imports, likely starting in early April, and threatened a new regime of reciprocal tariffs.
RESTRICTIVE TO NEUTRAL
Heath said monetary policy must remain restrictive for now, though it could shift to a neutral stance once inflation reaches the 3% target, something which the board expects to happen by mid-2026.
"If inflation behaves exactly as we are projecting, converging to 3% by mid-next year, then we would reach a situation where a restrictive monetary stance would no longer be necessary, and we could therefore aim for a neutral stance at that time," he said.
The deputy governor noted that headline inflation ended last year at 4.2%, matching the historical average from 2003 to 2019.
"Coincidentally, the two main inflation components we analyze, core and non-core, also closed the year at their historical averages of 3.7% and 5.9%, respectively. This means that, for the first time in four years, inflation returned to pre-pandemic levels," he said.
In January, both metrics fell below 4%, he added, placing them within the 1% variability range around the 3% target. "This indicates that we are getting closer to our inflation goal, definitely in the final kilometers of what has been a true marathon. However, the hardest part of any race is always the last.”
3% TARGET
Heath stressed that Banxico will not tolerate anything above the 3% target.
"The +/- 1% range around our 3% target is not a 'tolerance' band. Our target is precisely 3%. If inflation is at 3.9%, we are not at our target. It is a 'variability' range," he said.
"This means we aim to bring the current 3.7% inflation rate down to a 3% average by the third quarter of next year. We will not tolerate anything else.”
While core inflation is expected to continue its downward trend, this will depend on economic stagnation and a significantly less tight labor market.
"We face a new challenge in keeping core inflation on its downward path. Since goods inflation has dropped well below its historical average, we expect some rebound in these prices during 2025. Therefore, the current challenge is ensuring that disinflation in services outpaces inflation in goods," he said.
"While we will be lowering the policy rate throughout the year, we will maintain a restrictive stance consistent with this disinflationary process."