Trump Tariff Threat Bars Mexico From Cutting Rates, Heath Says

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Mexico shouldn’t start cutting interest rates while threats by U.S. President Donald Trump to slap tariffs on Mexican goods persist, deputy central bank governor Jonathan Heath said. Swap rates jumped.

"To try and start a new easing cycle before everything that’s happening is clarified, in the midst of so many risks and uncertainties, would be counterproductive," Heath said in an interview.

Among the key risks, he cited the possibility that other ratings firms could downgrade state oil company Pemex, and possibly Mexico itself. Last week, Fitch Ratings cut the oil company to junk while also lowering the sovereign rating. At the same time, Moody’s Investors Service shifted its outlook on Mexico’s rating to negative.

Mexico has kept its benchmark rate at a decade high 8.25% even as economic growth is expected to slow to as low as 0.8% this year. While central banks from Chile to India to Australia are slashing rates amid tepid growth, economists expect Mexico to remain on hold throughout 2019.

Despite the recent agreement on migration, Mexico needs to consider U.S. tariffs as an "almost permanent threat," Heath said. "This danger is a latent threat not for 45 days, and not even for a year and a half that Trump will be in campaign, but I think this is a permanent possibility as long as Trump is in power."

‘Maneuvering Room’

This doesn’t mean Mexico’s key rate should stay on hold until Trump leaves office, but it underscores how vulnerable the country is to Trump’s "bullying policy," Heath said.

While Mexico’s central bank has voted unanimously to keep rates steady, one of the board members tapped by President Andres Manuel Lopez Obrador took issue with the hawkish tone of recent statements. Gerardo Esquivel said the five-member board is overly concerned about inflation. This led to speculation that the other member tapped by the president, Heath, might soon become more dovish. For now, that’s not the case.

Mexico’s swap rates jumped 0.5 basis points while U.S. yields were unchanged.

Heath went on to say that Mexico may not follow the U.S. Federal Reserve if it cuts rates. But such a move by the Fed could give Mexico some "maneuvering room" to avoid a rate hike if one becomes necessary, he said, noting that the bank isn’t currently considering tightening monetary policy.

‘Very Distant’

Despite his resolve to keep rates steady amid such a high-risk environment, Heath warns the economy is very close to recession. He estimates second-quarter growth to be somewhere between 0% and 0.5%, after the economy shrank in the first quarter from the previous three months.

Lower rates would only help the economy on the margin because the informal sector is so large and low financial inclusion means borrowing costs don’t play a large role in boosting gross domestic product, he said.

For now, it’s too soon for Banxico to join economists in saying when it might start cutting, Heath said. "To try and think or guess whether there could be an easing cycle starting next year, whether it would be aggressive or not, seems very distant to me."

To contact the reporter on this story: Nacha Cattan in Mexico City at ncattan@bloomberg.net

To contact the editors responsible for this story: Carlos Manuel Rodriguez at carlosmr@bloomberg.net, ;Juan Pablo Spinetto at jspinetto@bloomberg.net, Robert Jameson, Walter Brandimarte

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