MNI INTERVIEW: Banxico To Keep Easing As Tariffs Hit - Sanchez

The Central Bank of Mexico is set to continue easing monetary policy, likely cutting rates by 50 basis points in May as signaled, even amid global uncertainty surrounding U.S. trade policy, former Banxico deputy governor Manuel Sanchez told MNI.

The view held by some analysts that Mexico could benefit from being left out of President Donald Trump's additional tariff list is mistaken, as all countries lose in a recessionary scenario, Sanchez, now an economic advisor to Spruceview, said in an interview.

"In its March statement, the board reiterated its intention to continue cutting rates by 50 basis points, making a May cut almost certain. For June, the decision will depend on the May announcement, but it is likely that the board will maintain the same pace of reductions," he said.

Sanchez highlighted that while the board stated interest rates would remain "restrictive," it did not specify the degree of restriction. "Given that the upper bound of the so-called neutrality range is 3.60% and the current average 12-month inflation expectation among analysts stands at 3.9%, Banxico likely envisions a terminal rate slightly above 7.50%, possibly around 8.00%," he noted.

The board should be more cautious given the high uncertainty in the external environment, he added.  (See MNI WATCH: Dovish Banxico Indicates At Least One More 50BP Cut)

Banxico cut its interest rate by 50 basis points to 9.00% last month, and signaled it will deliver at least one more cut of the same magnitude next meeting in May. 

URGENCY TO CUT

"The board has shown greater urgency in cutting the policy rate than in achieving the inflation target on a sustained basis. The current easing cycle began immediately after yet another postponement of the convergence date and has already included an additional delay. The board would have no concern about postponing it several more times."

The former official said the trade war points to a likely global scenario of stagflation, low economic growth combined with inflationary pressures.

"If the external inflationary shock were to push inflation in Mexico above the variability range — meaning above 4.0% — the board would temporarily pause the rate-cutting cycle. Otherwise, it would continue lowering rates, extending the predetermined course," he said.

Increases in inflation within the variability range would be fully tolerated, reinforcing the idea that Banxico’s actual goal is not to maintain inflation at 3.0% on a lasting basis, but rather to keep it below 4.0%, Sanchez said.

NO BENEFIT FOR MEXICO

"The view held by some analysts that Mexico could benefit simply because it was not included in Trump's list of reciprocal tariffs is misguided," he said.

"In a deeply recessionary scenario, relative comparisons of which country loses more or less become irrelevant. All countries lose, including the United States.”

The most serious potential consequence of the U.S. trade policy, based on tariffs and isolationism, would be a major setback for globalization, the former deputy governor said.

Some estimates suggest that once all the announced tariffs, including those from “Liberation Day,” take effect, the U.S. will have a weighted average tariff rate higher than that established by the 1930 Smoot-Hawley Act, according to Sanchez. Numerous studies have identified this law as a key factor in prolonging the Great Depression.

"The outlook is alarming," he said.