The Central Bank of Mexico may be forced to pause its easing cycle at the next meeting if the inflation outlook continues to deteriorate, former deputy director of macroeconomic analysis at the Ministry of Finance and Public Credit Eugenio Gomez Alatorre told MNI, adding that holding rates would be the prudent move.
"If the upward trend in inflation continues, Bank of Mexico will be forced to pause the rate-cutting cycle," Alatorre, now a professor at Universidad Panamericana, said in an interview.
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 more cuts ahead, without specifying their size.
"The decision shows that Banxico’s board has objectives other than price stability. Inflation is rising and has exceeded the upper limit of the central bank’s target. Cutting the rate in this context suggests that the board is not concerned about inflation, despite it being their legal mandate," he said.
"Holding the rate would have been the prudent decision given the recent negative inflation data," he added.
SPLIT DECISION
Regarding the split decision, Alatorre said that Heath "seems to be the only one who understands this and recognizes his responsibility as a deputy governor." (See MNI INTERVIEW: Banxico Likely To Slow Pace And Pause - Tapia)
"I think inflation will remain a concern in the coming months, and we’ll continue to see split votes. In certain scenarios, the divergence could grow, meaning we might see a three-to-two vote if the inflation outlook worsens," he noted.
The board removed from its statement the phrase indicating that the interest rate needs to remain in restrictive territory, which could suggest it is now aiming for the neutral rate by the end of the cycle, he said.
"But honestly, I’m not entirely sure how to interpret it. The board has shown a strong interest in continuing to lower rates, and it seems the rate will end up at 7.5%, despite high inflation."
INFLATION TREND
The former deputy director said a recent rebound in inflation, even in core inflation, might signal a trend.
"It’s true that economic activity is weak and that should help reduce inflation, but it’s not enough. Let’s remember there have been several episodes of stagflation in the past. Moreover, I believe Banxico can do little to boost growth, since the weakness is mainly due to a lack of private investment caused by an uncertain environment created by the government, and also by insufficient public investment," he said.
"A rate change won’t fix that, but ignoring inflation could lead to a rebound in prices on top of a recession, creating a worse problem: stagflation.”
Alatorre noted that, in principle, a more cautious Fed should also lead to caution in Mexico. "However, the dollar’s weakness driven by Trump’s policy creates room to narrow the interest rate differential between Mexico and the U.S. So, I don’t think the Fed’s decisions will have much impact on Banxico’s," he said.