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Mexico shouldn’t start a cycle of easing borrowing costs amid threats by U.S. President Donald Trump to slap tariffs on Mexican goods, deputy governor Jonathan Heath said.

"To try and start a new easing cycle before everything that’s happening is clarified, in the midst of so many risks and uncertainties, would be counterproductive," Heath said in an interview.

Among those risks are that more ratings agencies could downgrade state oil company Pemex, and possibly Mexico, after Fitch Ratings cut the company to junk and lowered the sovereign, Heath said. Moody’s Investors Service has also shifted its outlook for Mexico to negative.

Mexico has kept the benchmark rate at a decade high 8.25% even as economic growth is expected to slow to as low as 0.8% this year. While central banks from Chile to India to Australia are slashing rates amid tepid growth, Mexico has other considerations economists say will keep it on hold throughout 2019.

"What needs to be considered is this new threat, almost a permanent threat, on the part of Trump, that whenever he feels like it, he could suddenly pressure and place tariffs," Heath said. "This danger is a latent threat not for 45 days, and not even for a year and a half that Trump will be in campaign, but I think this is a permanent possibility as long as Trump is in power."

‘Maneuvering Room’

This doesn’t mean the rate should stay on hold until Trump leaves office, but it underscores how vulnerable Mexico is to Trump’s "bullying policy," Heath said.

While Mexico’s central bank has voted unanimously to keep rates steady, one of the board members tapped by President Andres Manuel Lopez Obrador took issue with the hawkish tone of recent statements. Gerardo Esquivel said the five-member board is overly concerned about inflation. This led to speculation that the other member tapped by the president, Heath, might soon become more dovish. For now, that’s not the case.

Even if the U.S. Federal Reserve cuts rates, Mexico may not follow, Heath said. What it may mean is "perhaps it wouldn’t be necessary to raise rates, so it gives us more maneuvering room," Heath said. The deputy governor said he’s not considering a rate hike, but if one becomes necessary, a Fed cut could prevent it.

‘Very Distant’

Despite his resolve to keep rates steady amid such a high-risk environment, Heath believes the economy is very close to a recession. He doesn’t expect one, but says second-quarter growth could be as low as 0.0% to 0.5%, after the economy shrank in the first quarter from the previous three months.

Lower rates would only help the economy on the margin because the informal sector is so large and low financial inclusion means borrowing costs don’t play a large role in boosting gross domestic product, he said.

For now, it’s too soon for Banxico to join economists in saying when it might start cutting, Heath said. "To try and think or guess whether there could be an easing cycle starting next year, whether it would be aggressive or not, seems very distant to me."

To contact the reporter on this story: Nacha Cattan in Mexico City at ncattan@bloomberg.net

To contact the editors responsible for this story: Carlos Manuel Rodriguez at carlosmr@bloomberg.net, ;Juan Pablo Spinetto at jspinetto@bloomberg.net, Robert Jameson

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