Mexico Inflation at 3.75% as Heath Warns Against Rate Cut After 3-2 Vote
Key Facts
Bank of Mexico Deputy Governor Jonathan Heath said the latest interest rate cut unsettles markets and sends the wrong message, as annual inflation accelerated to 3.75% in October from 3.45% in September. In a written response to Reuters, Heath said he was commenting in a personal capacity and that inflation expectations remained strongly tilted to the upside. His warning came after the five-member board cut the rate by 25 basis points to 6.25% on November 5, in a 3-2 vote. Heath voted to keep the rate unchanged. The disagreement within the board puts the inflation fight and the credibility of monetary policy guidance at the center of debate over the decision.
Heath said the cut wrongly suggested that inflation had made clear progress toward easing, while "the actual trend is upward." Data from the National Institute of Statistics and Geography support the warning: headline inflation was 0.650% month on month in October and 3.750% year on year. Annual core inflation also rose to 3.800% in October from 3.750% in September, while services inflation registered 4.32% annually. The Bank of Mexico targets inflation at 3%, with a margin of one percentage point above or below. Heath said the cut harms the chances of inflation converging with the 3% target by the end of 2027.
Heath listed factors he believes make a rate cut inappropriate, including higher domestic prices, the peso's recent decline, improved economic growth expectations and expectations of U.S. rate increases. The bank had kept the rate at 6.50% in its June, August and September decisions before the November cut. In May, the bank cut the rate by 25 basis points to 6.50%, saying then that headline inflation was still expected to converge with the target in the second quarter of 2027. In June, the bank said long-term inflation expectations remained above target and risks to the inflation path were tilted to the upside. This background shows that the current debate follows months of holding rates at 6.50% while warnings about price risks continued.
In the United States, the Federal Reserve kept rates in a range of 3.75% to 4.00% in October, after raising them by 25 basis points in September, while markets were expecting another increase in December. Heath said Fed rate increases at its next two meetings would reduce the interest rate differential between the two countries to 175 basis points, and described a drop below 200 basis points as "dangerous and irresponsible." The differential is linked to the appeal of carry trades that borrow in dollars to invest in pesos. A Reuters report said the Mexican currency had come under pressure as the Bank of Mexico's policy diverged from the Federal Reserve's, amid concerns that a narrowing yield gap would weaken the appeal of those trades. Heath believes continued inflation increases and Fed tightening could make a rate hike necessary, despite the bank's guidance to keep rates at the new level for an extended period.
After its November decision, the Bank of Mexico said keeping the rate at the new level for an extended period would support inflation's convergence with the target and remain appropriate for addressing external challenges. But Heath said this guidance limits the bank's room to maneuver, particularly if it needs to raise rates as inflation continues to rise and U.S. policy tightens. Heath's eight-year term on the bank's board ends in December 2026. Minutes of the November 5 meeting are scheduled for release on November 19, according to the bank's calendar, which usually sets minutes for publication on the Thursday two weeks after a decision announcement, except for the December decision. The calendar also set the quarterly report for November 26, with the next monetary policy decision due on December 17.