Fed hikes will limit Mexico’s monetary policy, central bank official says

The Bank of Mexico logo is seen on the facade of an office building in downtown Mexico City, Mexico, February 9, 2022. REUTERS/Edgard Garrido

MEXICO CITY, Feb 17 (Reuters) – The expectation that the Federal Reserve will start hiking interest rate soon has put limits on Mexico’s monetary policy, Bank of Mexico Deputy Governor Jonathan Heath said on Thursday.

Due to the close relationship between the U.S. and Mexican economies, the Bank of Mexico’s monetary policy decisions could not counter those of the Federal Reserve, he said during a virtual appearance before a Mexican business summit.

“We cannot have a monetary policy that is independent or countercyclical to the Federal Reserve,” he said. “If the Federal Reserve begins to raise in March, well, I think that practically sets a ceiling for us.”

Heath added that Mexico’s central bank was at a difficult “crossroads” due to stubbornly high inflation, especially core inflation, which strips out some volatile items.

Mexico’s core inflation surged to 6.21% in the year through January, a level not seen since 2001, while headline inflation eased slightly to 7.07%. That is still more than twice as high as the Bank of Mexico’s 3% inflation target rate.

Heath underscored that the Bank of Mexico’s monetary policy actions need to balance the issues of high inflation, adverse cyclical economic conditions in Mexico and the Fed’s expected interest rate hike cycle.

He said the Bank of Mexico’s monetary policy stance will need to be consistent with the inflationary problems Latin America’s second-largest economy is facing, while avoiding being too restrictive towards the end of year when inflation is expected to converge near the target.

At its last monetary policy meeting on Feb. 10, Mexico’s central bank raised its benchmark interest rate as expected by 50 basis points to 6.00%, a sixth straight rate increase, as policymakers sought to keep high inflation in check. read more

Heath noted that Mexico is currently seeing low levels of private investment, hampering its economic recovery.

“We don’t really have any (economic) growth engine” for 2022, he said.

Reporting by Anthony Esposito and Ana Isabel Martinez; Writing by Kylie Madry; Editing by Lisa Shumaker and Paul Simao

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