AMLO’s Banxico Pick Sounds Dovish Note on Inflation Outlook

Mexico’s nominee to become central bank governor, Arturo Herrera, said the country’s recent inflation spike seems to be related to temporary factors, in comments that suggest a dovish stance on recent price pressures.

“Most of the data that we have points to temporary issues,” Herrera told Bloomberg Television’s Maria Tadeo in an interview at the conference of finance ministers from the Group of 20 countries in Venice.

Herrera, who is currently finance minister, will step down after two years in his post next week. He has been nominated by President Andres Manuel Lopez Obrador to become central bank governor when current chief Alejandro Diaz de Leon’s term finishes at the end of the year.

AMLO’s Banxico Pick Sounds Dovish Note on Inflation Outlook

Inflation in Latin America’s second-largest economy hit more than double the bank’s 3% target rate in April and has failed to significantly slow since then. Banxico, as the country’s central bank is known, last month surprised economists by increasing the key interest rate in a split decision that showed disagreements within the board on the reasons for the price spike.

Read More: Banxico Board Member Calls June Rate Hike ‘Erratic’ And ‘Abrupt’

Mexico’s inflation struggles are partly explained by climate-related issues that have hit corn production, alongside pandemic-driven upticks to the prices of various durable domestic goods, Herrera said. Herrera declined to comment on whether he supported Banxico’s rate increase, the first since late 2018.

“We assume that as the vaccination roll-out keeps moving and people start going back to school and back to work, they will need less of these goods and the prices will go down,” he said, noting that prices for services including tourism and restaurants will increase.

Herrera expressed confidence that the Mexican peso would remain at around 20 pesos per U.S. dollar. The Mexican currency, which finished the week at 19.8685 to the dollar, depreciated swiftly at the beginning of the pandemic, reaching 25.35 per dollar in March 2020, before rebounding strongly. This month, Banxico’s hawkish tone has allowed the peso to be one of the few emerging currencies that has appreciated so far against the dollar.

“It’s going in the right direction,” Herrera said about it.

AMLO’s Banxico Pick Sounds Dovish Note on Inflation Outlook

Although Mexico’s economy is recovering faster than expected, the country is not experiencing the same inflationary pressures as the U.S. where the economy is moving closer to its full potential, Herrera said in off-camera comments. “We don’t see a huge pressure on the demand side,” he said after the television interview, adding that he would “love” to have that problem.

‘Over-leveraged’ Pemex

The government is working on a solution to state oil giant Petroleos Mexicanos’ massive debt load, Herrera said. The company stands up alongside the likes of Chevron Corp. and Royal Dutch Shell Plc when ranked by earnings before tax and other factors, he said, but is weighed down by tax and debt payments.

“Basically, Pemex is an ok-managed company with two problems: it’s over-taxed and over-leveraged, and those are the problems that need to be solved. We are already working on that,” he said.

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