Heath Estimates Inflation will Close Below 5% in 2023

Banxico’s Sub-Governor, Jonathan Heath explained that Banxico’s rates will not surpass the 12%, arguing that he believes that inflation might end below 5% by the end of 2023. 

Jonathan Heath, Sub-Governor, Board of Governors Bank of Mexico (Banxico) explained to El Financiero, that he would not expect the interest rate to fall below 10% by the end of 2023 after Banxico’s latest available data points indicate to a terminal rate between 11.25% and 11.75%. Heath argued that Banxico must implement strict rates due to Mexico’s “low financial penetration.”

Mexico’s low financial penetration requires more forceful monetary policies in comparison to other countries, explained Heath. However, the sub-governor clarified that Banxico is not planning on raising the terminal rate to 12%. On the other hand, Heath highlighted that he would not expect the interest rate to fall below 10% by the end of 2023.  

Heath considered that the reference rate is already approaching its terminal level and highlighted that it is vital to determine the period that it will last at that level before starting a downward cycle. The sub-governor argued that anticipating its level or when it will be reached is not primordial. Heat explained that the rates will depend on how long inflation takes to converge to Banxico’s long-term target of 3%.

Heath highlighted that Mexico has less financial depth and penetration than advanced countries and some emerging countries. The country’s lag causes transmission channels to be less efficient when implementing monetary policies. "For the same reason, the transmission channel of expectations becomes much more important and requires stronger monetary policy actions compared to other countries," he said.

IMF studies and other organizations have found that transmission channels are vital and effective. However, it must be considered that monetary policy works with lags of 6 to 24 months. Heath estimates that the headline and core inflation indexes will end 2023 below 5%. 

National Banking and Stock Commission (CNBV) defined financial inclusion in 2020 as “the access and use of formal financial services under appropriate regulations that guarantee protection schemes for users and promote financial education to improve the financial capacity of all segments of the population,” according to a CNBV press release. 

Banxico increased the target interbank rate by 50 base points to 11.00% on Feb. 10, 2023, as it seeks to tackle inflation. However, Banxico explained that the evolution of data indicates that future increases will likely be smaller. The Central Bank highlighted that global inflation continues to affect the Mexican economy, while lower energy prices have supported a decrease in headline inflation, as reported by MBN. 

The Mexican Congress approved the appointment of Jonathan Heath as a member of the Governing Board of Banxico on Jan. 23, 2019 until the period ending on Dec. 31, 2026 according to Banxico’s website.