Banxico Has Room Ahead for More Rate Cuts, Deputy Governor Says

Mexico’s central bank should be able to resume its cycle of interest rate reductions after the first quarter of 2021 once the slowdown of inflation is confirmed, Deputy Governor Jonathan Heath said.

“I definitely think that this easing cycle has not necessarily come to an end, which means there should be room up ahead,” Heath said in a telephone interview on Friday. “There is a possibility after April, May -- and inflation numbers, they start coming down quite fast.”

While some economists including Alonso Cervera at Credit Suisse AG see the central bank known as Banxico cutting rates again Dec. 17 in the last meeting of the year, Heath said he hadn’t decided on his vote but that the decision would be a “very, very data dependent” possibility.

Banxico surprised the market on Nov. 12 by deciding to pause its longest and deepest rate easing cycle. Analysts saw further reductions amid Mexico’s worst recession in almost a century yet the board argued that it needed to understand better an inflationary path that saw price gains persisting above the bank’s target range, keeping the key rate steady at 4.25%.

Banxico Has Room Ahead for More Rate Cuts, Deputy Governor Says

At the time, Heath cast the dissenting vote in the five-person board, supporting a quarter point reduction to 4%. Since then, Mexico reported a dramatic slowdown in inflation to 3.43% in the first two weeks of November compared to 4.09% in October.

“Why do I want to have the rate come down right now? Because going up in the couple of months ahead it’s going to be much harder. I think that maybe a pause for the first three or four months of next year is just kind of logical,” Heath said during the interview with Bloomberg News.

The policy maker also said that he’d support negative real rates, meaning adjusted by inflation, should the situation require it and depending on the evolution of prices. He added that policy makers will need to think “outside the box” because inflation drivers seem to be coming from supply and shock distortions, such as a lack of medicines, which aren’t well controlled by monetary policy.

Latin America’s second-largest economy is expected to contract 8.9% this year, according to Banxico, as the pandemic sapped demand and caused millions to lose their jobs. The central bank sees gross domestic product averting its worst-case scenario for a 12.8% drop and slightly improved its outlook for next year, forecasting a 3.3% rebound.

©2020 Bloomberg L.P.

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