Mexico central bank minutes show newest board member's dovish thinking

© Reuters. FILE PHOTO: The facade of the Bank of Mexico building is pictured in downtown in Mexico City, Mexico February 28, 2019. REUTERS/Daniel Becerril

By Anthony Esposito

MEXICO CITY (Reuters) -New Bank of Mexico board member Galia Borja emerged as one of two dissenting doveish voices when the central bank unexpectedly raised interest rates last month due to concerns about inflationary pressures, minutes from its latest monetary policy meeting showed Thursday.

With the votes of Banxico governor Alejandro Diaz de Leon and members Irene Espinosa and Jonathan Heath, the bank's five-member board decided by a majority to raise the benchmark interest rate by 25 basis points to 4.25% at the June 24 meeting.

The minutes provide some of the first insight into Borja's thoughts on the predicament of how to conduct monetary policy in an uncertain environment of high inflation. She is the bank's newest board member.

Borja said inflation has been subject to significant pressures in recent months, but that most of them seem to be associated with supply-related problems and to changes in consumption patterns as a result of the pandemic, a situation "I believe will hardly be solved through monetary policy."

"An unpredictable tightening of the monetary policy stance could be interpreted as a change in the cycle rather than a reinforcement of the current policy stance, which would lead to an even greater tightening of local financial conditions, and therefore be counterproductive," she said.

Borja said the best path forward would be to remain consistent with the bank's communication and monetary policy approach, which has been characterized for being prudent, cautious, gradual, and predictable.

Finance Minister Arturo Herrera, who has been tapped to become Banxico's next governor, underscored in a Wednesday interview with Mexican media that the future path of interest rates will depend on determining if inflationary pressures are permanent or transitory, and the speed of Mexico's economic recovery.

Herrera said an analysis was needed in Mexico "because it could be that what is happening with inflation is that there are sectors where economic activity is highly concentrated, there are very few players, then they can keep prices higher than if there was more competition."

Mexican annual inflation was virtually unchanged in June at 5.88% from 5.89% in May, slowing slightly less than expected and remaining well above the central bank's 3% target rate.

Most of Banxico's board underscored that while the shocks affecting inflation are expected to be transitory, "given their variety, magnitude, and the extended time frame in which they have been affecting inflation, they may pose a risk to the price formation process," said the minutes.

They said the balance of risks for inflation's anticipated path is tilted to the upside.

Looking ahead, the bank's monetary policy implementation will depend on the evolution of the factors that have an incidence on inflation, on its foreseen trajectories, and on its expectations, according to the majority of board members.