Bank of Mexico Deputy Governor Sees Room for More Interest-Rate Cuts

MEXICO CITY—The Bank of Mexico has room to make more interest-rate cuts in coming months if the current downward inflation trend consolidates and the U.S. Federal Reserve remains in easing mode, said deputy governor

Jonathan Heath.

Mexico’s central bank last month cut the overnight interest-rate target by a quarter percentage point to 8%—the first rate cut in five years after a long tightening cycle. The reduction came as Mexico’s economy stagnates amid global recession fears and inflation is falling toward to the central bank’s 3% target.

Mr. Heath, who joined the central bank last January after being appointed by President

Andrés Manuel López Obrador,

said the Fed’s stance offers “a window of opportunity” to keep cutting rates. “If inflation is almost on target and the economy isn’t growing, such a restrictive stance is not justified,” said Mr. Heath in an interview. “There is room to go from an excessively restrictive stance to a moderately restrictive stance.” The rate differential between Mexico and the U.S. is at historic highs around 5.75 percentage points, which guarantees good returns for investments in peso-denominated assets. The Bank of Mexico estimates the neutral interest rate—one that is neither restrictive nor accommodative, but consistent with an economy growing in line with potential and inflation on target—to be around 5.6%. Mr. Heath, a private economist son of Canadians with a doctorate from the University of Pennsylvania, is seen among the least hawkish of the Bank of Mexico’s five board members. He said the central bank has “ample room” to cut rates and still maintain an attractive spread above U.S. rates. But he warned that a possible easing cycle would depend on a reduction in core inflation, which excludes volatile energy and agricultural prices, future rate decisions by the Fed, and the peso’s impact on prices. The peso is among the world’s most-traded currencies, and investors often use it to hedge emerging market exposure. The Bank of Mexico had raised interest rates more than 10 times since late 2015 in response to higher U.S. interest rates and rising inflation in Mexico caused by a weaker peso and a steep jump in gasoline prices. But consumer prices have been steadily slowing down, with annual inflation at 3.16% in August, the lowest since October 2016. Meanwhile, economic growth has faltered. Mexico’s economy shrank 0.3% in the first quarter and stagnated in the second with zero growth, mainly because exports and private investment were depressed and private consumption slowed down in an environment of economic uncertainty after the nationalist Mr. López Obrador took office in December. Economists say Mr. López Obrador’s controversial decision to cancel a partially built airport in Mexico City and an energy policy that favors state oil giant Petróleos Mexicanos at the expense of holding new rounds of oil auctions for private investors is having an impact. External factors, such as the trade war between the U.S. and China, the global economic slowdown and the pending ratification in the U.S. Congress of the new trade deal between Mexico, the U.S. and Canada also are weighing on investor confidence. Before the central bank’s cut last month, Mr. López Obrador publicly called for lower interest rates several times, saying they would spur growth and encourage consumption. Mr. Heath denied that had any influence in last month’s move. “We are completely independent and that won’t change,” he said.

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