Lt. Gov. Heath sees more rate hikes needed to tackle inflation

One of the deputy governors of the Bank of Mexico, Jonathan Heathwas of the opinion that the key interest rate should continue to rise in order to face the complex inflationary problem and considered that the conditions for a decoupling with the United States Federal Reserve are not yet in place.

Banxico has increased the reference rate by 600 basis points, to a record high of 10%, as part of a cycle of increases that began in June 2021 amid inflation that reached a record in August and September of more than Two decades.

“I believe that we still need to continue increasing rates and we said that in our monetary policy announcement that we released on November 10,” he said in a Banorte podcast, estimating that the ex-ante real rate is around of 4.7% that he considered necessary and that should be restrictive to cool down inflation.

Heath forecast core inflation to continue rising to around 8.6-8.7% in November, peaking between then and December, and then could start a downward trajectory that he called long, difficult and fragile.

“If there are no unanticipated shocks between now and the end of 2023, I believe that the downward trajectory in core inflation is finally viable and we could be slightly below 4% levels by the end of next year.” , he asserted.

The general year-on-year inflation in Mexico stood at 8.28% in the second half of October after touching levels of 8.77% in the second half of August.

Regarding the future steps of Banxico compared to those of the Federal Reserve of the United States (Fed), the official said that “we are not yet ready for a decoupling”.

“I think it is very important that in the short term we continue to move more or less in line with the Fed and look further ahead, but when we really see that this inflation problem has been overcome in both countries, everyone will make decisions that could imply a decoupling,” he added.

But I don’t see it just around the corner, not at all,” he said. Heath added that the priority for the Mexican economy should be to reduce inflation rather than focus on growth.

Heath said that if in the short term Banxico begins to raise the rate less than the Fed and begins to decrease the spread there could be adverse consequences for the Mexican peso.

“I think it could have negative effects, we could see much more volatility, we could even see the exchange rate or the Mexican peso start to depreciate somewhat. In the short term I don’t think it’s something that suits us,” he said.