MNI EM INTERVIEW: Banxico Mulling More Gradual Policy - Mejia

The Central Bank of Mexico carried out a “calibration” process in the first half of the year with a series of 50 basis point cuts and is now considering “graduality” in its next moves, Deputy Governor Omar Mejia told MNI, adding that the monetary path should be sufficient to ensure inflation converges to target.

"While the calibration process was associated with 50-basis-point reductions, we’re now entering a phase where we’re considering that graduality will allow the continuation of the rate-cutting cycle," Mejia said in an interview at his office in Mexico City.

Asked whether the board is evaluating a pause in its easing cycle next week, he added: "What was communicated is that downward adjustments continue to be considered. That’s what was stated in the statement and in the minutes and it is being discussed going forward."

Banxico cut its policy rate by another 50 basis points to 8.00% last month, with Deputy Governor Jonathan Heath voting to hold at 8.50%. The board signaled further cuts ahead, without specifying their size. (See MNI INTERVIEW: Banxico Could Be Forced To Pause Cuts -Alatorre)

"As with all collegiate decision-making bodies, sometimes decisions are unanimous, sometimes not. But what matters is that decisions at the Bank of Mexico are based on the inflation outlook and the responsibility to fulfill the constitutional mandate of price stability. Beyond the vote composition, what’s important is that monetary policy decisions reflect the macroeconomic environment and are consistent with that mandate," the Deputy Governor said.

RESTRICTIVE STANCE

The board removed from its statement the phrase indicating that the interest rate must remain in restrictive territory. Mejia said there are many ways to evaluate the restrictiveness of monetary policy, but the key message is that the path will remain consistent with the convergence of inflation to the 3% target.

He noted that Banxico’s estimated neutral range is between 1.8% and 3.6% in real terms. At the midpoint, the neutral rate would be around 2.7%, and since it measures an unobserved variable, the discussion about how restrictive the stance is should consider a broader set of factors, such as the evolution of economic slack and labor market dynamics.

"That’s why I think the removal of that phrase perhaps suggests that the stance will now be evaluated from different angles, on how restrictive the stance actually is," Mejia emphasized.

The Banxico official reiterated that the board is fully committed to the 3% inflation target. "Some criticism may arise because we’ve emphasized a calibration process with 50-basis-point cuts and communicated that more cuts are being evaluated. But our communication is consistent with the inflation-targeting framework, which is based on forecasts."

Beyond short-term noise, the board needs to focus on inflation trends, he noted. "Inflation is near historical levels, and the challenge now is bringing it down from those levels to the 3% target," he said.

"We welcome constructive criticism. But instead of alarmism around a single data point, central bankers must explain inflation dynamics, the nature of shocks, and the strategy behind monetary policy decisions. That clarity has helped ensure that our decisions are well received by the public and markets. In a context of heightened uncertainty, a central banker’s role is not to add volatility, but to communicate as clearly as possible."