By Anthony Esposito and Ana Isabel Martinez
MEXICO CITY (Reuters) – Bank of Mexico board member Gerardo Esquivel cautioned against increasing the monetary policy rate to “excessively” restrictive levels because the economy stays weak, saying the bank’s current rate-hiking cycle could end with rates between 10%-10.25%.
Esquivel, who is taken into account dovish and was appointed to the bank’s five-member board in 2019, didn’t project when the speed would hit what he called its terminal level in an interview with Reuters on Tuesday.
But he stressed that it was “vital to begin fascinated about” what that level can be using the so-called ex ante real rate, defined because the difference between the nominal rate of interest and expected inflation.
“Expected inflation for 2023 is around 5%, roughly, which suggests that a rate of 10.0% or 10.25% can be compatible with a level for the actual (interest) rate that I believe is high enough and restrictive enough,” Esquivel said.
Banxico, because the Mexican central bank is thought, has aggressively increased the important thing rate of interest 525 basis points to a record 9.25% this cycle, which began in June 2021, as inflation surged above a two-decade high.
“Once we reach the terminal rate, the discussion must be how long we stay there and we might must see how observed inflation evolves in 2023,” he said.
WARNING AGAINST EXCESSIVELY RESTRICTIVE RATES
Esquivel said that Banxico, whose autonomy is guaranteed by the Structure, was committed to its mandate of keeping inflation in check, but not in a way that will “inflict an excessively high cost” on an already weak economy that continues to be recovering from the pandemic.
Private analysts polled by Banxico see Mexico’s economy growing 2.0% this yr after which slowing to a 1.2% expansion next yr.
Headline annual inflation in Latin America’s second-largest economy stood at 8.53% in the primary half of October, a greater than two-decade high and much above Banxico’s inflation goal of three%, plus or minus 1 percentage point.
But forecasts show consumer prices easing next yr and Banxico sees inflation converging to its goal within the third quarter 2024.
In that context, Esquivel cautioned against increasing rates much further, underscoring “what we must not do is take the monetary stance to an excessively restrictive level … the economy is vulnerable, it’s a fragile economy.”
His comments come after the minutes of Banxico’s last monetary policy decision highlighted that further rate hikes were on the table. The minutes said the board would “assess the magnitude of the upward adjustments within the reference rate” in coming decisions.
After being named in 2019 to Banxico’s board to interchange an ailing board member, Esquivel’s term is about to complete at the tip of the yr, but President Andres Manuel Lopez Obrador could nominate him for a further 8-year term.
Esquivel added that rate of interest levels “that we currently have and that we expect to have next yr, are at atypically high levels and we cannot think they will stay there for very long.”
Regarding the U.S. Federal Reserve, which is predicted to go for its fourth consecutive 75 basis point rate of interest hike on Nov. 2, in line with economists polled by Reuters, Esquivel said Banxico shouldn’t be obliged to follow its moves in lockstep.
“We’re already at a restrictive level that the Fed is clearly not at,” he said. “If the Fed has to proceed raising rates more since it began later, since it has demand pressures that we do not, for whatever reason, then we haven’t got to follow along.”
(Reporting by Anthony Esposito and Ana Isabel Martinez; editing by Stephen Eisenhammer and Nick Zieminski)
Copyright 2022 Thomson Reuters.
