Banxico to Hike This Month and Take Cues From Fed, Heath Says

(Bloomberg) -- Mexico's central bank will probably raise the key interest rate this month, and then follow inflation data and U.S. Federal Reserve decisions closely to decide its next moves, Banxico board member Jonathan Heath said.

The debate for February's decision will be whether to increase borrowing costs by a quarter point or half a point, he noted in a podcast with a Grupo Financiero Banorte analyst. He added that starting in March, it may be difficult to hike rates each time by 50 basis points as Mexico waits for the Fed to act and needs to take into account its own sluggish economy, Heath said.

“It's going to be very data-driven,” he said. “We'll need to measure very carefully to make sure we are accompanying a process of inflation slowing eventually to our target but at the same time taking into account the cyclic conditions of our own economy.”

Policy makers led by outgoing central bank Governor Alejandro Diaz de Leon raised the benchmark rate by a half-point to 5.5% in December, their most aggressive hike since February 2017. All eyes are now on the new governor, former spending chief Victoria Rodriguez Ceja, and whether inflation will keep slowing from a two-decade high.

Same Pace as Fed

Heath said if Mexico is lucky the central bank can merely hike rates at the same pace as the Fed. But that will depend on whether inflation subsides as expected, he said. In the past the nation had to raise rates higher than the Fed to prevent capital flows from affecting the exchange rate and impeding the slowdown in inflation, he noted.

Banxico expects inflation to end 2022 at 4% and reach 3% in mid-2023, Heath said. Core inflation is expected peak in February or March, he added.

But for now services inflation, excluding housing and education, have increased at an annual rate of about 6%, which is very worrisome, Heath said.

Very Important Problem

“It is a clear sign that we cannot really rest on the cyclical conditions of the economy to try to think that inflation can go down, because clearly we still have very important problems in this price adjustment that is clearly a generalized phenomenon,” he said.

Mexico's annual inflation slowed slightly less than expected in early January to 7.13% compared to a year earlier, remaining well above the central bank's target. But core inflation outpaced analyst expectations and Heath noted at the time that it is “still a very complicated scenario.”

As inflation remains at elevated levels, the Mexican economy has also hit a standstill. The country slid into a technical recession last year as gross domestic product fell 0.1% in the fourth quarter from the previous three-month period.