Mexico central bank to stay data-dependent

Bloomberg

Mexico’s central bank will continue taking a data-dependent approach to monetary policy going forward, central bank Governor Alejandro Diaz de Leon said in an interview, after the board decided to keep borrowing costs at their lowest in almost five years.
The bank’s decision to hold its benchmark interest rate at 4% amid an inflation spike prompted some analysts, including at JPMorgan Chase & Co. and Capital Economics, to conclude its board had now finished its record easing cycle.
Asked if those views were correct, Diaz de Leon told Bloomberg News, “We have highlighted that we need to remain data dependent. Obviously there are, I would say, various shocks on the economy and on inflation.”
Mexico is likely to have a negative output gap “for some time,” he said, while noting that prices have faced upward pressure from supply shocks, the Mexican peso’s depreciation, and a shift to demand for goods instead of services.
In the absence of significant fiscal stimulus by the government of President Andres Manuel Lopez Obrador, Banxico has done most of the heavy lifting in battling last year’s 8.2% contraction — and the recovery appears to be slowing. Economic activity declined 5.4% year-on-year in January, double the 2.7% reduction registered in the previous month, the country’s statistics institute said.
Since August 2019, Banxico, as the bank is known, aggressively cut rates from 8.25%. The bank has recently taken a more cautious approach, refraining from cutting the key rate at its November and December meetings before unanimously deciding on a quarter-point reduction last month.
A spike that saw inflation speed beyond its target ceiling in early March, a weakening of the peso and rising US Treasury yields have added pressure to impede more monetary easing.
During the interview, Diaz de Leon also said that markets were currently more “volatility prone” given the unprecedented combination of a pandemic shock with current U.S. monetary policy. He said data that confirms a strong recovery or low inflation scenario would help “calm markets.”
“If we don’t get that combination, that may introduce additional volatility to markets and we need to be ready for both,” he said.
Analysts have warned that Lopez Obrador’s efforts to reassert state dominance in the energy market could add to volatility and further weaken the peso. Asked about the subject, Diaz de Leon said Mexico needs proper incentives to boost investments.
“In order to sustain not only the recovery this year but to sustain rapid growth, we need to have strong investment,” he said.