Subgobernador Jonathan Heath Discusses the Influence of US Interest Rates on Banxico’s Decisions
Jonathan Heath, the undersecretary of the Bank of Mexico (Banxico), acknowledged that the US interest rate will have a more significant impact on Banxico’s decisions starting from the second half of 2023.
Current Economic Context
Heath explained that inflation is now closer to the target, and with the economic cycle pointing towards a more negative output gap, there is room to lower the interest rate.
Jaime Álvarez, vice president of investments at Skandia, highlighted that the interest rate differential between Mexico and the US serves as an incentive for investors to stay in the market during uncertain times.
Relevance of Interest Rate Differential
Heath mentioned that the interest rate differential was crucial in 2022 and early 2023 when Mexico’s inflation was rising due to global shocks, peaking at 8.70% in September 2022 – the highest annual variation in two decades.
However, Heath noted that the relevance of maintaining this differential has diminished in recent years as the economic cycle now indicates a more negative output gap, allowing for interest rate reductions.
Economic Cycle and Monetary Policy
Heath emphasized that the economic cycle’s position and product gap conditions are crucial factors in monetary policy decisions.
He stated, “If we have an economy that is stagnant with a probability of entering recession or experiencing prolonged stagnation, this leads to a more negative product gap and helps reduce inflationary pressures, giving us the space for a less restrictive monetary stance.”
Analysts Predict Tightening in May, with Rates Ending 2023 Between 7.75% and 8%
Analysts from Skandia, Valores Mexicanos Casa de Bolsa (Valmex), and Banco Base concur that the Governing Board will likely implement another adjustment of 50 basis points in the decision scheduled for May 15.
Gabriela Siller, director of economic and financial analysis at Banco Base, and Gerónimo Ugarte, chief economist at Valmex, believe there is a possibility that the Governing Board’s decision in May could be made by a majority vote.
This might result in one member voting for a 25 basis point reduction, which is less than what the market anticipates. This consideration comes from recent inflation data showing more pressure from exchange rates, particularly in merchandise prices.
Siller forecasts that Mexico’s interest rate will end the year at 8%, while Valmex and Skandia experts predict that the Governing Board will leave the rate at 7.75% in December, a level that is “more neutral” and better aligned with less inflation pressure in a recessive economic cycle.
Key Questions and Answers
- Q: When will US interest rates have a more significant impact on Banxico’s decisions? A: Starting from the second half of 2023.
- Q: Why is the interest rate differential between Mexico and the US important? A: It serves as an incentive for investors to stay in the market during uncertain times.
- Q: How does the current economic context influence Banxico’s decisions? A: Inflation is closer to the target, and with a more negative output gap, there is room to lower interest rates.
- Q: What do analysts predict for the May decision and the end of 2023 interest rates? A: Analysts anticipate a 50 basis point adjustment in May, with rates ending the year between 7.75% and 8%.
