Introduction
Economists from the International Monetary Fund (IMF) and private sector specialists, gathered by business consultancy Rankia, have expressed concerns about the potential imposition of tariffs on specific imported products. These tariffs could increase inflation risks and undermine investor confidence, according to the experts.
IMF’s Preliminary Findings and Concerns
The IMF’s preliminary findings from their annual visit to Mexico, conducted between August 2 and 27, highlight the risks associated with recent tariff impositions on imports from countries without trade agreements with Mexico. The experts advise against measures that distort trade, such as these newly implemented tariffs.
During their visit, the IMF team analyzed Mexico’s monetary policy and inflation. They suggested that any further relaxation of the reference rate should only occur once it’s clear that inflation is on track to reach the 3% target.
The IMF acknowledged recent monetary policy adjustments as appropriate but emphasized that additional interest rate cuts would require clear signals that underlying inflation and inflation expectations are moving towards the 3% target.
Monetary Policy and Inflation Target
This year, the Bank of Mexico has reduced the rate by 225 basis points, lowering it from 11.25% to 7.75%. This significant reduction accounts for 64% of the total rate cuts since March 2023. However, this rapid pace of monetary easing has raised concerns among some private sector experts who believe the speed does not align with the inflation trend.
According to INEGI data, underlying inflation has remained stagnant between 4.90% and 4.22% this year, while general inflation has fluctuated around 3.59% since January.
From Neutrality to Expansion and Detachment
Invex’s chief economist, Ricardo Aguilar, warned that further rate cuts could shift the monetary policy from a restrictive phase to an expansive one, which might be hazardous in achieving the precise 3% inflation target.
Aguilar referred to the risk of detaching inflation expectations. He noted that Subgovernor Jonathan Heath has voted to keep the rate unchanged in two consecutive announcements, signaling caution. Invex expects the nominal rate to end the year at 7.25%, transitioning into a neutral phase with further reductions leading to an expansive policy.
Multiva’s economist, Pau Messeguer, echoed Aguilar’s concerns, stating that implementing an expansive interest rate policy could trigger a new inflation cycle and detach expectations.
Recommendations for Improved Communication
The IMF experts recommended enhancing the Bank of Mexico’s communication strategy, targeting various audiences, including households. They suggested providing information to ensure the general public understands the bank’s actions.
This improved communication would strengthen the transmission of monetary policy to inflation expectations, as the central bank currently relies only on surveys from regional businesses, private sector experts, and manufacturing companies.
The IMF mission proposed publishing alternative scenarios with macroeconomic assumptions and associated interest rate trajectories, presented as indicative and conditional—not as commitments.
Key Questions and Answers
- What are the concerns of IMF and private sector experts regarding tariffs on imported products? – They warn that these tariffs could increase inflation risks and undermine investor confidence.
- What have been the recent adjustments to the Bank of Mexico’s interest rate? – The rate has been reduced by 225 basis points this year, lowering it from 11.25% to 7.75%.
- Why are some experts concerned about the pace of monetary easing? – They believe the rapid reduction in interest rates does not align with the current inflation trend.
- What could be the consequences of shifting from a restrictive to an expansive monetary policy? – It might be hazardous in achieving the precise 3% inflation target and could trigger a new inflation cycle.
- How can the Bank of Mexico improve its communication strategy? – By targeting various audiences, including households, and providing information to ensure the general public understands its actions.
- What alternative scenarios did the IMF experts propose for the Bank of Mexico? – They suggested publishing alternative scenarios with macroeconomic assumptions and associated interest rate trajectories, presented as indicative and conditional.
