Mexico City.– In addition to the prevailing environment of divergence within the Board of Governors of the Bank of Mexico (Banxico), two of its four deputy governors expressed their concern about the credibility of the central bank in the face of the constant upward revisions of its inflation forecasts, in addition to questioning its constitutional commitment to price stability.
Banxico’s minutes corresponding to its monetary policy decision of August 8, published this Thursday, exposed the divergence between the verdicts of the members of the Board, since it was decided by a divided vote (3 to 2) to reduce the reference rate by 25 basis points, to a level of 10.75 percent.
Among the members who suggested maintaining the rate, Deputy Governor Irene Espinosa stood out, suggesting not to rush an adjustment in the monetary stance, in addition to favoring an approach that benefits Banxico’s credibility. “Inflation expectations continue above our forecasts and show no signs of turning around, and the balance of risks remains skewed upwards. Going forward, exchange rate volatility could be exacerbated by internal and external factors. This would hinder the disinflationary process, even given the expected slowdown in economic activity.
“Given the circumstances and risks described, a cut in the reference rate would undermine the credibility of this central bank in its commitment to the constitutional mandate of maintaining price stability,” Espinosa said in the minutes released today.
Jonathan Heath, who also voted to hold the rate, questioned Banxico’s credibility after the decision to cut interest rates amid an environment of inflationary pressures. “The decision to reduce the monetary stance undermines our credibility given the fact that headline inflation has risen over the past five months and now stands at 5.6 percent. Core inflation is currently at 4 percent, while surveys place it at the same level for the end of this year and just 3.8 percent by the end of 2025, meaning they no longer expect inflation to slow down. “Our trajectory for core inflation for the next eight quarters is extremely optimistic and lacks credibility. “Current inflation data and medium-term expectations simply do not support this decision,” Heath said. He added that the monetary policy regime adopted by Banxico some time ago sought to eliminate fiscal dominance and focus its efforts primarily on price stability. “Voting in favor of reducing the monetary stance at this time, in the face of a high fiscal deficit and a still unconfirmed weakness in economic activity, while we are far from our goals, could be interpreted as premature until we ensure that we are on the right path supported by firmer data,” said the deputy governor. Governor Victoria Rodríguez Ceja, deputy governor Galia Borja and deputy governor Omar Mejía voted to reduce the interest rate, arguing that their decision was based on the moderation of the underlying component of inflation.
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