Banxico considers it appropriate to pause rate cuts in the face of rising inflation: Jonathan Heath

Monterrey, NL. The deputy governor of the Bank of Mexico, Jonathan Heath , warned that the economy is in a delicate situation and requires cautious measures to maintain control of inflation , with the goal of reducing it to 3% by the third quarter of 2025. However, this scenario could change if there are changes in the global economy or in U.S. trade policy.

Headline inflation currently stands at 4.9% and has picked up in the short term. "If the interest rate is cut by another 50 basis points in the next monetary policy decision on June 26, we would be less than 100 basis points away from the high end of the target rate range," Heath noted.

Given the recent spike in inflation, he considered it prudent to pause the cuts to assess whether the inflation slowdown projections actually materialize in the third quarter. "My view is that maybe it's time to pause and observe the behavior of inflation to see if it's really going down," Heath said.

Heath added that Banxico's Governing Board will discuss this issue at its June 26 meeting, acknowledging that these are complex decisions given the current conditions.

The discussion comes after Banxico lowered its benchmark interest rate to 8.50%, from a peak of 11.25% reached during the most restrictive period of monetary policy following the pandemic.

"We expect this small rebound to be temporary and that inflation will resume its downward trajectory in the coming months. However, most surveys disagree with this view and estimate that inflation will close the year at around 3.7%," he indicated.

What is the opinion of analysts?

What analysts are seeing, he noted, is that this rebound in merchandise prices could continue to offset the decline in services prices, preventing core inflation from continuing to decline. "I think that's basically what most are anticipating, while the Bank of Mexico is betting that services prices will begin to decline due to cyclical conditions."

"We're in that debate, which has a lot to do with the monetary policy restrictions that have been applied. The interest rate was very aggressive; we maintained a highly restrictive stance. However, especially since this year, the neutral level is estimated to be 4%, so such a high level was no longer necessary. Even so, the current rate of 8.50% is above the previous high."

Behavior of inflation

In context, Heath noted that since the pandemic, due to the disruption in global supply chains, inflation began to decline in 2022, in line with other economies. He added: "Inflation didn't actually decline between 2022 and 2023, but rather stagnated."

In mid-2024, the downward trend resumed, closing last year with inflation close to 4%, approaching the target of 3%. The most recent inflation figure for May is 4.42%, which shows a new rebound.

In the case of non-core inflation, which is more volatile and doesn't respond to monetary policy, it was driven by increases in chicken prices in May, and at other times, it has been affected by increases in the price of onions, lemons, and avocados.

"These recurring shocks can't be anticipated, making it very difficult to sustain inflation at 3%," said Jonathan Heath.