Banxico to Hold Key Rate for ‘as Long as Possible,’ Board Member Says

Michael O'Boyle and Maya Averbuch, Bloomberg News

Jonathan Heath , Photographer: Alejandra Rajal/Bloomberg

(Bloomberg) -- Mexico will keep its key rate at a record high for its next three meetings at the very least, said one of the central bank’s five board members, as policy must remain restrictive for “as long as possible” to ensure inflation falls back to target.

The central bank, known as Banxico, last month ended a record hiking cycle and promised to keep the key rate at 11.25% for an extended period. Given the “complicated and uncertain” inflation outlook, Banxico’s decisions will be data dependent, meaning a single rate cut wouldn’t imply the beginning of a longer easing cycle, according to central banker Jonathan Heath.

“We want to keep the monetary policy in the restrictive zone for as long as possible — and that’s way more than three decisions,” Heath said in an interview with Bloomberg News Friday at an event hosted by the Mexican Stock Exchange. “It has to remain in restrictive territory until we’re very sure that inflation is almost reaching our target.”

Banxico’s unanimous decision on May 18 to end its 725 basis-point tightening campaign that began in June 2021 came against the backdrop of the peso’s rally to a seven-year high and slowing inflation.

Read More: Mexican CPI Slows More Than Forecast After Tightening Cycle

Consumer price data for May posted earlier this week showed annual inflation cooled again last month to 5.84%, almost 300 basis points below last September’s cycle high of 8.7%. The central bank targets the annual inflation rate at 3% plus or minus a percentage point.

Governor Victoria Rodriguez said last week the bank will hold at the current rate for at least the next two meetings. Core inflation, which had been one of the bank’s primary concerns and excludes volatile items such as fuel, has slowed more gradually than headline inflation.

The May core reading of 7.39%, while in line with analysts’ forecasts, is more than 150 basis point above the headline figure.

Even if the US Federal Reserve increases its rates, Banxico is likely to continue holding, except in the case of surprises, Heath said, adding that Banxico’s policy stance relative to the Fed was no longer a key or critical consideration.

Mexico could eventually eliminate its International Monetary Fund credit line, in order to avoid the expense of maintaining it, given the strength of Mexico’s reserves, Heath said. Mexican authorities had said previously that they were pursuing a gradual path to exit arrangement.