By Ana Isabel Martinez
MEXICO CITY, Nov 12 (Reuters) – The Bank of Mexico’s recent interest rate cut sows confusion and sends the wrong message as the inflation outlook remains skewed to the upside and the US Federal Reserve seems primed to keep hiking its key rate, Deputy Governor Jonathan Heath said on Thursday.
Heath, whose eight-year term on the central bank’s board ends in December, voted last week to keep the benchmark rate unchanged. The five-member board at Banxico, as the bank is known, ultimately voted 3-2 to cut rates by 25 basis points to 6.25%.
The rate cut “confuses and sends the wrong message that we have seen clear progress on inflation, when the actual trend is upward,” Heath told Reuters in a written response on Wednesday, commenting in a personal capacity.
In fact, days after Banxico’s surprise decision, official data showed annual headline inflation accelerated to 3.75% in October from 3.45% in September. Banxico targets an inflation rate of 3%, plus or minus one percentage point.
Heath said the decision runs contrary to a number of economic data points and forecasts, including rising Mexican prices, the peso currency’s recent depreciation, improved economic growth forecasts and expectations for more Fed rate hikes.
“The balance of risks for inflation is heavily skewed to the upside, and this misplaced cut only further hurts the chances of seeing inflation converge to its 3% target by the end of next year,” he said.
Banxico last week signaled a rate pause ahead, saying that maintaining the policy rate at the new level for an extended period will support the convergence of inflation to its target and remain adequate to face external macroeconomic challenges.
Asked about that forward guidance, Heath said it limits the bank’s room to maneuver, especially to raise rates, which could become necessary if inflation keeps rising and the Fed keeps tightening.
The Fed held interest rates unchanged in a range of 3.75% to 4.00% in October after raising them by 25 basis points in September. Markets anticipate another hike in December.
“If the Fed hikes at its next two meetings, the differential would fall to 175 basis points … putting the differential below 200 points is dangerous and irresponsible,” said Heath.
The peso has been under pressure as Banxico decouples from Fed policy, fueling fears that a narrowing yield gap will reduce the appeal of “carry trade” operations, in which investors borrow lower-yielding dollars to invest in higher-yielding pesos.
Nearing the end of his term at Banxico, Heath said the “biggest pending issue we have is understanding in depth why we have never managed to make inflation converge to 3% and stay there.”
(Reporting by Ana Isabel Martinez; Additional reporting by Noe Torres; Writing by Anthony Esposito; Editing by Iñigo Alexander and Nia Williams)
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