MNI INTERVIEW: Too Early To See Core Downtrend-Banxico's Heath

It is too early to confirm a clear downward trajectory in Mexico’s core inflation, Central Bank of Mexico Deputy Governor Jonathan Heath told MNI, adding that it is also premature to conclude that recently-implemented taxes and tariffs will not generate second-round effects.

"In my personal view, we would need to wait a bit longer," he said in emailed comments when asked whether first-half February data were sufficient to establish a sustained decline in core prices.

In mid-February, core inflation eased to 4.52% from 4.56% in the same period of January, though headline inflation accelerated to 3.92%, partly driven by increases in the IEPS tax on the production of certain goods and services. Both measures remain above Banxico’s 3% target.

Core inflation is a key determinant of monetary policy decisions. (See MNI INTERVIEW: Banxico Likely To Extend Easing Pause - Gomez)

Asked whether it is already possible to say with greater certainty that new Mexican taxes and tariffs on countries without a trade agreement, implemented last month, will not generate second-round effects and will prove temporary, Heath said "not yet."

"In my opinion, not yet, as they could still have lagged effects," he said.

IEPS TAX

In January, Mexico raised the Special Tax on Production and Services (IEPS) in a bid to curb consumption and increase revenue.

After the release of minutes from Banxico’s last meeting and an interview this morning with Deputy Governor Galia Borja, in which she told Bloomberg that Banxico has room to cut rates and sees no significant near-term price pressures, analysts ramped up expectations for a March rate cut.

Banxico’s board paused its easing cycle this month, keeping the benchmark rate at 7.00%, and said it "will evaluate additional reference rate adjustments." 

The pause followed 12 consecutive rate cuts, five of which saw Heath dissent in favor of keeping rates on hold.

Regarding potential inflationary pressures from the World Cup in the second half of the year, Heath said he does not believe it could lead Banxico to shift its stance toward a more restrictive level.

"Only minor and temporary pressures from the World Cup are expected. I believe there are much more important risks," the deputy governor said.