Exclusive: Banxico Should Maintain Restrictive Policy to 2024, Deputy Governor Says

Irene Espinosa contradicts the Bank of Mexico’s official line, suggesting lower interest-rate hikes, while forecasting higher inflation

Irene Espinosa - Subgobernadora de BANXICO
February 24, 2023 | 12:34 PM

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Mexico City — The Bank of Mexico (Banxico) should maintain a restrictive stance until 2024 and issue forward guidance that conveys how premature it would be to think about interest rate cuts for now, Deputy Governor Irene Espinosa told Bloomberg Línea.

Espinosa said that maintaining a restrictive level would allow for some adjustment in monetary velocity, such as pausing the cycle or even reducing the nominal interest rate; however, she added that at this time it is important to be clear that there will not be an accommodative or reductive policy.

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She believes it was hasty for the monetary policy statement of February 9 to suggest a slower pace of interest rate hikes in the next decision of March 30, especially because, in her opinion, it is contradictory to the upward adjustment of inflation forecasts .

As the monetary authority, we do not help by saying what will happen in the next decision or the next two decisions, but by being able to transmit that our vision is of an eight-quarter horizon, and it seems to me that it is most likely that in these eight quarters (until 2024) we will have to maintain a restrictive stance.

Irene Espinosa, Banco de México deputy governor

Twenty-four economists surveyed by Bloomberg and the 33 participants of a Citibanamex Survey predicted an interest rate hike of 25 basis points in the monetary decision of February 9, however, Banxico surprised the market and raised the benchmark by 50 points to place it at a record level of 11%.


In its statement it included a forward guidance in which it anticipated that the increase in the reference rate could be lower at the next meeting on March 30, which most analysts responding to the Citibanamex Survey have already interpreted as an increase of 25 basis points.

Irene Espinosa, the first woman to be appointed deputy governor of Banxico, indicated that being so explicit in the statement would help the market to take the magnitude of the increase for granted when Banxico’s mission is to tell the market that there is awareness of the restrictive stance that has been reached, but that even so the terrain is still very uncertain.

We were all clear about the possibility that in the next decision the pace could be reduced, [but] it was clear to me that communicating that was premature, while the rest of the board felt it was important to communicate it to the market, especially because of the surprise element. My argument was exactly the opposite; I said, if we already surprised once, it would be very costly to surprise again.

Irene Espinosa, Banco de México deputy governor

Asked about her forecast for the interest rate level, however, Espinosa declined to answer, and argued that it would not be a good idea to express any specific rate level because that could create confusion and would be risky, considering that the real short-term rate may be constantly changing due to the dynamics of inflation and expectations.


The deputy governor granted the interview to Bloomberg Línea after Banxico published the minutes of the February 9 monetary decision in which she expressed a dissenting vote, stating in the interview that “we must be extremely cautious in our forward guidance.

You can listen to a podcast about Bloomberg Línea’s interview with Irene Espinosa here, in Spanish:

February inflation does not confirm downward trend

Irene Espinosa, who is a member of the central bank’s board of governors since January 24, 2018, called it good news that inflation in Mexico fell more than expected by the market in the first fortnight of February 2023, however, she said that the data for the first half of the month does not confirm a downward trend.

The country’s consumer price index (CPI) rose 0.30% with respect to the previous fortnight, bringing annual headline inflation to 7.76% in the first fortnight of February, according to the country’s statistics bureau INEGI. Core inflation increased by 0.35% on a biweekly basis, and by 8.38% on an annual basis in the first half of February.


I think it is always important to look at data, but I also always mention that one swallow does not make a summer. I think that one piece of data should not lead us, it is not enough to lead us already to confirm that the downward trend is already a fact, I would say that it is too premature to talk about that.

Irene Espinosa

She added that we are still in a diagnostic stage of how effective the medicine administered by Banxico has been to reduce inflation to the 3% target, considering that the level of monetary tightening was barely reached in August 2022.

“We need to see how much the inflationary dynamics are already responding to the medicine administered,” Espinosa said.

Without underestimating the improvement in inflation in the first fortnight of February, “we must be careful in how we read the data, and review the factors that are generating the persistence of headline and core inflation”, she said.


Banxico and the Federal Reserve: Will they realign?

The deputy governor said that there has been a lot of conversation regarding whether Banxico follows the US Federal Reserve’s lead, and whether the two central banks are paired. However, she stated that some members of the board of the Mexican central bank have been very emphatic in saying that the Fed is an important variable, but not the only one that is taken into account.

It is an important variable, but Banxico’s monetary policy function is autonomous, it does not depend on what the Fed does, and in my opinion this surprise [the 50-basis-points hike], not so much because of the surprise but because of the magnitude, also confirms to the market that we are not mechanically following the Fed.

Irene Espinosa

Espinosa said that, last year, there were several movements of the Fed and Banxico with the same magnitude, which responded to the fact that inflation levels were similar at that time, and therefore the reaction was similar, however, the Fed started with increases in the benchmark and inflation began to decrease, contrary to what is happening in Mexico.

She added that the monetary policy transmission channels in the United States and Mexico have different levels of effectiveness, since in the case of the US the credit channel is very effective and very fast, and in the case of Mexico not so much. An example of this is that Banxico adds 700 basis points and today there are increases in credit demand and credit placement, which shows the lag in the operation of this channel.

The main message is that monetary policy is autonomous, of course it is very important, it is one of the variables that we take into account within a whole set of information that we analyze, but we do not go in line [with the Fed], and that message must be clear.

Irene Espinosa

Going forward, what can be expected are periods where Banxico and the Fed are likely to take similar actions, and periods where there is no alignment.


The new board of governors and AMLO

Espinosa was appointed as the first female deputy governor in January 2018, in the last year of former president Enrique Peña Nieto’s six-year administration, and her term ends on December 31, 2024. Today, she is the only member of the board of governors who was not appointed by the government of President Andrés Manuel López Obrador (AMLO).

Governor Victoria Rodríguez Ceja and deputy governors Jonathan Heath, Galia Borja and Omar Mejía were appointed by AMLO, as the president is known, and three of them also worked with the president through their positions at the Ministry of Finance.

Espinosa assures that the dynamics of the board have not changed with the new configuration, and which she considers a success of the central bank’s internal laws, because it ensures diversity, independence and differing profiles of board members.


Somehow I feel that there is this idea that before the board, or the configuration of previous boards, had a similar way of thinking, however, there were very important discussions. There has never been one single, unilateral way of thinking on the board and that is why I say that the configuration generates diversity and discussion.

Irene Espinosa

Espinosa said that the members of the current board of governors are in tune with and committed to price stability.

Questioned about AMLO’s suggestion that Banxico should also take charge of economic growth; she responded that the bank’s price stability mandate is precisely to stimulate growth, since price stability is the best environment for investment and growth.

And in her opinion, there is no need for an explicit mandate regarding growth because at the end of the day the bank’s mandate is to procure economic growth.

Perhaps in the short term the rate increases will be painful for some sectors, but if we allow inflation to persist and remain rooted in the economy, the entire population will suffer from it, and we will be slowing down growth.

Irene Espinosa
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