MEXICO CITY Reuters -- Bank of Mexico board member Gerardo Esquivel cautioned against increasing the monetary policy rate to excessively restrictive levels, as the economy remains weak, and said the bank's current rate-hiking cycle could end with rates between 10% and 10.25%.
Esquivel, who was appointed chairman of the bank's five-member board in 2019, did not project when the rate would hit what he called terminal level in an interview with Reuters on Tuesday.
He stressed that it was important to think about what that level would be using the so-called ex ante real rate, defined as the difference between the nominal interest rate and expected inflation.
Expected inflation for 2023 is around 5%, which means that a rate of 10.0% or 10.25% would be compatible with a level for the real interest rate that I think is high and restrictive enough, according to Esquivel.
The key interest rate was raised by the Mexican central bank by 525 basis points to a new record 9.25% this cycle, which began in June 2021, as inflation went above a two-decade high.
The discussion needs to be how long we stay there when we reach the terminal rate, and we need to see how inflation evolves in 2023, he said.
Esquivel said that Banxico, whose autonomy is guaranteed by the Constitution, was committed to keeping inflation in check, but not in a way that would cause an excessively high cost for an already weak economy that is still recovering from the Pandemic.
Private analysts polled by Banxico believe that Mexico's economy will grow 2.0% this year and then slow down to a 1.2% expansion next year.
In the first half of October, the headline annual inflation in Latin America's second-largest economy stood at 8.53%, a more than two-decade high and far above Banxico's inflation target of 3%, plus or minus 1 percentage point.
Consumer prices are expected to fall next year, and Banxico believes that inflation will be closer to its target in the third quarter of 2024.
In that context, Esquivel cautioned against increasing rates, underscoring what we must not do is take a monetary stance to an excessively restrictive level, the economy is vulnerable, it is a fragile economy. His comments came after Banxico's last monetary policy decision highlighted that further rate hikes were on the table. The minutes said the board would assess the magnitude of the upward adjustments in the reference rate in coming decisions.
After being named to Banxico's board in 2019 to replace an ill board member, Esquivel's term will end at the end of the year, but President Andres Manuel Lopez Obrador could nominate him for an additional 8 year term.
Esquivel stated that interest rate levels that we currently have and that we expect to have next year are at atypically high levels and we cannot think they can stay there for very long. According to analysts, Banxico is not obliged to follow its moves in lockstep, as the U.S. Federal ReserveFederal Reserve is expected to go for its fourth consecutive 75 basis point interest rate hike on November 2, according to analysts.
He said that we're already at a restrictive level that the Fed is not at. If the Fed had to raise rates more because it started later, because it has demand pressures that we don't, for whatever reason, then we don't have to follow along.