MNI INTERVIEW: Banxico Majority Wants One More Cut Soon- Heath

The majority of the Bank of Mexico’s board is considering a rate cut at the next meeting if April inflation improves, and if it does not they are still likely to vote for a cut in June, Deputy Governor Jonathan Heath told MNI, adding that in his view the central bank should not reduce borrowing costs again.

"I think the majority of the board is considering a cut at the next decision in May, but they are waiting to see how inflation behaves to justify the move. If inflation does not come down in April, the most likely scenario is a pause in May and a cut in June," Heath said in an interview during the IMF’s Spring Meetings in Washington.

While inflation may possibly decline in April, that would not necessarily be the beginning of a downward trend, he said, adding: "It's something that can be explained by somewhat domestic, somewhat calendar-related factors."

Still, in his view, this could be enough to motivate the rest of the board to vote for a cut at the next meeting.

"I would not agree, because one data point is not sufficient evidence,” he said.

Banxico cut its interest rate by 25 basis points to 6.75% last month, with Heath and fellow Deputy Governor Galia Borja dissenting in favor of holding borrowing costs unchanged. The board said it "will evaluate the appropriateness and timing for an additional reference rate cut."

OUTLOOK REVISION

"The majority is looking for one more reduction, whereas previously they were thinking of perhaps two or three more. At least that has been revised, and I see that as positive, because we are now in a situation where further rate cuts could start creating risky conditions," Heath said.

"I do not think we should cut even one more time, but it is in the forward guidance, and the majority thinks we should," he added. (See MNI: Concerns Over AI Boom Major Theme At IMF -Latam Delegates)

Heath said it is more difficult for others to explain why they voted for a cut than for him to justify a pause. He also criticized the board’s inflation forecasts, saying that even the more optimistic institutions surveyed see inflation higher than Banxico’s projection.

"The reason why I voted for a pause is very clear. We started from a situation where we came out of 2025 with no real progress on inflation. We began last year with headline inflation at 3.6% and it ended the year at 3.7%, while core inflation increased 100 basis points in the year."

RATES IN NEUTRAL ZONE

Despite that, he noted, Banxico brought its interest rate into the neutral zone. "The message you are sending every time you cut the rate is that you are comfortable with the inflation outlook. However, the data tells me something different," he said.

The deputy governor noted that one of the board’s arguments for cutting rates is the lagged impact of past monetary tightening, but he added that these are gradually dissipating, while underlying inflation remains above target.

"And now there are three or four shocks that make your risk balance much more complicated," referring not only to the war in Iran, but to taxes on some items imposed by Mexico’s government earlier this year, together with tariffs on countries without trade agreements, and to significant supply shocks for three or four major agricultural products.

It is still not clear whether the increases in taxes and tariffs will not produce second-round effects, he said.

"I cannot speak for the others, but I think they truly believe inflation will fall in line with the projection, which nobody else believes, but they do. If I thought that is what was going to happen, I would also be voting to cut the rate," he said.