Banco de México (Banxico) will have to take action if inflation does not drop to about 5% for most of the remainder of 2021, said Governing Board member Jonathan Heath, providing a reference. when policymakers would consider raising interest rates.
Banxico would try to keep borrowing costs at 4.25% until the United States Federal Reserve (Fed) begins to raise its own rate, but whether it can do so will depend on inflation, Heath said in a podcast with Banorte economists.
Last week, policymakers surprised the 23 economists surveyed by Bloomberg by raising the key rate by a quarter of a point for the first time since 2018, warning against expectations of rising inflation expectations and spillover effects on the prices.
His decision, which was divided among the five board members, came hours after inflation accelerated to more than 6% in early June, when analysts expected otherwise.
“If inflation doesn’t go down even than we think it might go down, closer to 5%, for most of the rest of this year, we’re going to have to take action,” Heath said. “It turns out that this temporary bubble is not being so temporary, perhaps we have a structural problem that we should look at,” he said.
The central bank, he noted, has waited three years for inflation to converge towards its target. Given that there are new problems with pricing that were not seen last year, it would be necessary to reassess how much longer the bank could wait for that convergence.
Heath, who has been considered a moderate member after voting minority decisions in favor of a looser monetary policy, appears to have taken a more restrictive turn in his most recent comments.
Heath said current high levels of inflation were to be expected with Mexico’s economic recovery, which could fully recoup its pandemic-related losses by the end of 2022. But the supply-side shocks, coupled with high prices of services due to stifled demand, have caused high inflation to persist.
Given the current outlook, reducing rates is practically out of the question, he added.
“The best scenario would be to have a relatively long hiatus, the longest we could have, and wait for the Fed to start raising rates,” Heath said. “Are we going to be able to maintain that rate for an extended period of time? Well, that’s the big question. “
