Interview with Jonathan Heath, deputy governor of Banco de México
The inflation data for the first half of April, at 6.24% per annum, “was very much in line with the trajectory anticipated by Banco de México, which significantly increases the probability that the rate we reached in March is either the terminal rate that we were looking for,” warned Lieutenant Governor Jonathan Heath in his personal capacity.
“I am not affirming that the terminal rate is 11.25 percent. I said that it significantly increased the probability that it is. How to interpret this data? We are getting closer and closer to actually being 11.25%, but we still have to see how the information that will be given between now and May 18 unfolds. Precisely, the inflation data for April is missing and we should have a better idea of how inflation is coming from the first half of May”.
Interviewed by El Economista, he explained that now, the Fed’s decision has been losing relevance (it is still not completely irrelevant, but it is much less relevant than before). What does this mean? That our decision will surely be the same whether or not the Fed raises its rate in its next decision, scheduled for May 3.
The central banker stressed that this is his very personal opinion. “You have to remember that at the end of the day, the decision is collegiate. It could be that I think that 11.25% could be the terminal rate, subject to the information that we will know in these weeks, but it would be necessary for my colleagues on the Board to think the same”.
Unlike the global inflationary pressures that have hurt Mexico since the end of 2020, now it is domestic tensions that are putting pressure on the National Consumer Price Index (INPC). And that is where the restrictive monetary policy can already act, said the central banker.
He recognized that now “we are seeing some domestic inflationary persistence” that must be broken, since merchants raise prices assuming that the trajectory of inflation will continue to rise.
You are giving up external pressure
The central banker showed that the global inflationary pressures that have hurt Mexico since the end of 2020 are already subsiding.
It was supported by the prices of the commodities of the International Monetary Fund (IMF); the price index of the Food and Agriculture Organization of the United Nations (FAO); as well as the pressure indicator of the global chains made by the New York Fed and the cost of maritime freight, among other indicators, to confirm that the global pressure has begun to subside and is going to stop feeding the inflation that has hurt Mexico.
And he added that “the central bank’s restrictive policy has little impact on these pressures, and it would have been very naive to think that, by accelerating the rate hike, we would have lowered inflation and the rest of the world would not. The initial shock was global”.
“Now we are presenting a more inertial inflation due to domestic inflation persistence and we have a sufficiently restrictive rate to face this challenge.”
Agustín Carstens, general manager of the Bank for International Settlements, calls it psychological pressure. From international organizations such as the International Monetary Fund (IMF), the deputy managing director, Gita Gopinath, recommends maintaining a restrictive position to face this inflationary persistence, she pointed out.
And among members of the Monetary Policy Committees that include the Banco de México Governing Board, there is a more or less broad consensus that the monetary stance we have now is restrictive enough to combat inflation.
Now we must ensure that this is the terminal rate and determine how long we will keep it at that level, in order to allow the restrictive policy to act on inflation, in the horizon in which it operates, which we estimate is around eight quarters.
They are six months in restrictive phase
In the conversation, the central banker specified that we have been with the rate for six months in a restrictive position, which is sufficiently oriented to face the complexity of the domestic inflation problem.
To determine this restrictive stance, it was necessary to take as a reference the range of the neutral real rate, which was estimated by Banco de México between 1.80 and 3.40%, a proportion that results from the difference between the nominal rate and the 12-month expectations that They are about to come.
The neutral real rate, of 2.6%, was estimated to be consistent with economic activity around its potential level and inflation close to its long-term target.
Right now, the ex ante real rate is 6.5%, which is the difference between the nominal rate, which is 11.25%, and the inflation expectations for the next 12 months, which are 4.75 percent. This means that we are 300 points above the high range of the neutral rate.
Guide policy without generating volatility
Deputy Governor Heath took the attached table of the phases of increases in the monetary policy rate to explain that up to now four phases of six or seven that this cycle will have have passed.
Right now we are in Phase Four of the monetary policy rate, which I call “in search of the terminal rate,” he said. And now we must identify how long the rate must remain unchanged to allow the monetary restriction to act on inflation, which will be the fifth phase of the cycle.
And a sixth will come, where we must adjust it based on the expectations that we hope will continue to drop, but maintaining a restrictive stance.
As shown in the attached table, developed by Deputy Governor Heath himself, Phase I of the Rate began in June 2021 and ended in December of the same year, it consisted of four increases of a quarter point each that brought the nominal rate 4 to 5 percent.
At that time, the rate had no effect on inflationary pressures because first, they came from abroad and then we remained below the low range of the neutral rate, in an expansive stage. We had to continue making progress in raising the rate to a position that would allow us to face the pressures that would come later on the domestic side.
