Rate cut sends wrong signal on inflation, Banxico’s Heath warns

Inflation risks remain skewed to the upside, Bank of Mexico (Banxico) Deputy Governor Jonathan Heath stressed in an exclusive Reuters interview. He said the Mexican central bank’s latest interest rate cut “confuses and sends the wrong message” to financial markets.

Recent rate reductions make it more likely that inflation will fail to return to Banxico’s 3% target, Heath added. He also warned that forward guidance signalling an extended hold in rates leaves less room for manoeuvre should further tightening be required.

Heath’s main points:

With inflation on an upward trend, he says the latest cut in the key interest rate “Confuses and sends the wrong message”.

The latest rate reduction makes a return to the 3% inflation target by end-2027 less likely.

By signalling that rates will remain unchanged for an extended period, the bank limits its room for manoeuvre, particularly for increases that may be necessary if inflation fails to ease or the US Fed continues to raise its rate.

A fall in the interest rate differential between the Fed and Banxico below 200 basis points, if the US Fed raises rates at its forthcoming meetings, would be “Dangerous and irresponsible”.

Understanding in depth why the bank has failed to bring inflation back to 3% and keep it there remains the most important outstanding task.