The period in which Jonathan Heath (Mexico City, 1954) has been deputy governor of the Bank of Mexico, a position that gives him a vote within the board that decides monetary policy, has been atypical. Nominated by President Andrés Manuel López Obrador in January 2019, Heath has faced the unexpected shocks caused by the Covid-19 pandemic, which triggered inflation to reach 8% in Latin America's second economy.
In addition, the Government has increased the minimum wage by approximately 20% each year, putting pressure on the cost of living. Another channel is inflating consumption: the increase in social programs, including pensions for older adults, young apprentices and parents. “Definitely, we are facing a much more difficult environment” than other Government Boards, he tells EL PAÍS in an interview in the days before the start of the National Banking Convention that will take place in Acapulco on Thursday, April 18 and Friday, April 19. The global commercial panorama is mixed, adds the specialist, and the exchange rate is more difficult to anticipate than ever.
Ask.
The most recent inflation record places it at 4.4%, above the central bank's target range. What is your perspective?
Answer
. It is easier to lower inflation from 8.7% (level reached during the pandemic) to 4.4% than from 4.4% to 3%. We are entering the most difficult terrain, where we must endure more and be patient, because we are facing a difficult panorama, latent risks and many difficulties ahead. Inflation, although it has decreased lately, has been showing signs of persistence, of wanting to stay there and of particular concern are the prices of services that do not yet show a downward trend. That is the part we need to observe in order to finish our task.
P.
At its last meeting, all but one of the bank's board members voted to cut the benchmark interest rate for the first time in three years. Is this the beginning of a cycle of cuts?
R.
Here are two aspects to look at from the monetary stance. There are those who see it simply from the nominal rate and do not want to relax it. However, those of us who look at it from the ex ante real rate (the one that discounts the inflation expectation) see that this cut from 11.25% to 11% practically leaves the rate within the range that we have been observing over the last year. So we are not really easing the monetary stance to make it less restrictive, rather we are maintaining it with this small adjustment. Four members voted not to reduce the restrictive monetary stance, interpreting it as the real rate ex ante.
Q.
In the years in which you have been deputy governor, the bank has navigated two atypical inflationary components for the country: increases in the minimum wage and social aid. Has the bank's task been more difficult than in previous periods?
A.
We are definitely facing a much more difficult environment, but it is not only the problem of salary costs and an expansionary fiscal policy, but also a pandemic. No government board had had the complication of an inflationary outbreak as a result of a pandemic. That makes it not just a couple of things, but a large number of things that have been explaining inflation in these last three years. On the margin, the pressures that are most worrying are the ones you mention.
Q.
Before coming to the bank, you were a supporter of increasing the minimum wage. A couple of years ago he said it should be done, but the time was not right. What does he think now?
A.
My opinion has not changed. Five years ago the minimum wage was ridiculously low, there was great room to raise it and it is good that it has done so. Now, after five years of average increases of around 20%, plus some small increases at the end of the previous six-year term, it is beginning to be a much more relevant reference parameter, playing an important role in the economy. The problem is that the distance between the minimum wage and average wages has been narrowing. Now, an increase in the additional minimum wage is already beginning to push up the average wage. I believe that we already have a real respectable minimum wage, we can no longer talk about it being so low. I think it is already much more aligned with what a minimum market salary could be. From now on, we simply have to take care of it so that it does not go down in real terms.
Q.
What can Mexicans expect from global markets for the remainder of the year?
A.
We have a mixed outlook. There are countries that are doing very well and others that are not doing so well. We have, for example, the case of the United States, which has shown surprising strength. The fiscal and monetary stimuli that it received in the first year of the pandemic were truly unprecedented and are still there, in some form or another, behind a very resilient, very strengthened performance of the American economy. Its labor market shows no signs of beginning to weaken. We have practically left the possibility of a recession or slowdown behind us. On the other hand, there are other regions that are not doing so well. Europe shows a complex scenario because it is feeling the effects of a very close war. Other countries are also suffering from geopolitical factors, some still have the problem of inflation and it is not so clear that raw material prices will not rise again.
The environment continues to be complicated and within that the role of Mexico stands out, which has an internal economy that showed very surprising resilience last year. Household consumption increased at a good pace and a surprise that no one saw coming was an increase of almost 20% in private investment. It is growth that we have not seen in 20-25 years. The very strength of the Mexican economy has been one of the factors that has played a role in the persistence of inflation. Although it has been decreasing, not as quickly as we would have liked and in large part it is due to facing this very resilient economic activity. And this year, with the expansive fiscal policy, which I understand perfectly well why the federal government is doing it, it greatly complicates our work.
Q.
It is widely said that the rate differential between Mexico and the United States is what has driven the strong appreciation of the peso against the dollar. Does this also complicate the work of the Governing Board? The possibility that by lowering the interest rate there will be an abrupt outflow of capital?
A.
The foreign exchange market has become much more complex in recent years. Previously, in order to analyze it we looked at the balance of payments, if there was a deficit in the current account, how the price of oil was because we were exporters, the holding of public debt by foreigners, and with that we more or less got an idea of what nonsense But there have been structural changes that I think few people talk about. Firstly, we are no longer a net oil exporting country, so the price is no longer irrelevant. We have remittances, which now represent 4% of the Gross Domestic Product (GDP), when before it did not even reach half of what it is now. In the portfolio investment part, eight years ago more or less the holding of public debt, just over 36% was in the hands of foreigners, but it has been decreasing over time and in the latest data we already see this holding not It doesn't even reach 14%. This was true even in the period from July 2022 to August 2023, when the exchange rate appreciated the most. At that time, not only was there no massive inflow of investment, but there was an outflow of capital.
Therefore, it is no longer so clear that this type of investment is what is most determining the exchange rate. It must be taken into account that just over 80% of all Mexican peso transactions occur outside the country. We have many things that are determining the type of change that occur in another part of the world. I'm also not going to be naïve and say that it doesn't matter, obviously it matters, but no longer through the traditional mechanisms of yesteryear. Now they are derivatives, options, and hedging contracts, which are carried out in other parts of the world that use the peso as a hedging vehicle. This demand for the peso has nothing necessarily to do with the strength of the Mexican economy or with the performance of the economy. So, it is not so clear that, if we lower the rate, the demand for pesos worldwide could be affected. It is much more difficult today to try to anticipate the trajectory of the exchange rate than it was at any other time in our history.
Q.
The Banking Convention is approaching, how is the Mexican financial system getting there?
A.
We have a very strengthened, well-capitalized and much better regulated banking system. Our stability is truly impressive. We withstood the test, perhaps more difficult, which was the 2009 banking crisis, then we withstood a second very important test which was the pandemic. In this last year, when we have seen a restrictive monetary stance, we see a banking system that has not suffered the effect of high rates, and we see it, for example, in personal credit, consumer credit, companies that continue to grow . Delinquency rates have also not risen above the trend of recent years. One would think that with higher rates there would be an increase in delinquencies, but this has not been observed. So, I believe that the banking system is strengthened in very good conditions despite the restrictive monetary stance that we have maintained in the last year.
_