February 14, 2020 / 1:20 PM / 10 days ago

Mexico central bank: monetary policy depends on lower inflation consolidating

MEXICO CITY, Feb 14 (Reuters) - The path of Mexico’s monetary policy will depend on the central bank’s evaluation of whether upcoming data shows lower inflation is consolidating, Governor Alejandro Diaz de Leon said on Thursday.

The five-member board of Banxico, as the Bank of Mexico is known, voted unanimously on Thursday to cut its key interest rate by 25 basis points to 7.0%, as expected. It was the fifth straight rate cut, with the Mexican economy stagnating and headline inflation above the bank’s target.

“We have to monitor the risk factors that might impact inflation in the coming weeks,” Diaz de Leon told Reuters in an interview. “The next decision will be towards the end of March and we’ll have to evaluate how (inflation) has behaved … if a scenario of lower inflation consolidates or if we see some sort of resistance.”

Annual inflation rose 3.24% in the year through January, up from 2.83% in December and above the bank’s target of 3.0%. Core inflation in particular has been stubbornly high, partly because of higher excise taxes on cigarettes and sugary drinks.

“Also, salary increases have been larger than would be expected given the cyclical position of the economy, and that likely affected (core inflation’s) resistance to decline,” said Diaz de Leon.

Mexico’s government in December agreed to raise the daily minimum wage by 20%, the biggest wage increase in more than four decades and the second major increase in as many years.

Diaz de Leon said the bank would raise its 2020 inflation forecast “moderately” and lower its economic growth forecast when it publishes its next quarterly report, on Feb. 26.

The previous quarterly report projected 2020 headline inflation of 3.0%, core inflation of 2.9% and gross domestic product growth of 0.8% to 1.8%.

“The Mexican economy has been facing challenges and risks beyond those exclusive to its (economic) cyclical, associated with the uncertainty of the free trade agreement, with monetary policy in advanced economies, and also domestic risk factors,” Diaz de Leon said.

Mexico’s economy contracted last year for the first time in a decade as businesses curbed investment, amid uncertainty surrounding the trade relationship with the United States, its top trade partner, and some of the policy decisions of Mexican President Andres Manuel Lopez Obrador.

“To the extent that we have an environment of less uncertainty, we believe that both investment and consumption could improve,” Diaz de Leon said.

A new regional trade agreement between Mexico, the United States and Canada is helping to ease some of that uncertainty.

Diaz de Leon said that Banxico aims to strike a balance in its monetary policy decision-making between the conditions that weigh on inflation and the cyclical position of economic activity and the product gap.

“We consider all the elements that weigh on the inflationary process and that’s why the product gap and the pace of economic activity enter into the decision making process for monetary policy,” said Diaz de Leon.

He said considering all of these elements and the condition of the economy, interest rates are at their “most convenient for the economy and for price formation.” (Reporting by Anthony Esposito, editing by Larry King)

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