TLDR:
- Bank of Mexico may consider larger interest rate cuts in future meetings
- Mexico’s inflation is cooling, with headline inflation at 4.66% and core at 3.95%
- Banxico lowered its key rate to 10.50% in September, the second straight cut
- Market consensus anticipates further rate cuts, but the path remains uncertain
- Incoming Mexican President Claudia Sheinbaum will inherit a “solid” economy
Mexico’s central bank, Banxico, is considering the possibility of larger interest rate cuts in upcoming meetings as inflation in Latin America’s second-largest economy continues to cool.
Bank Governor Victoria Rodriguez revealed this development in a recent interview, signaling a potential shift in the country’s monetary policy.
Banxico lowered its key interest rate by 25 basis points to 10.50% in September, marking the second consecutive cut as price pressures ease. The previous cut, also by a quarter of a percentage point, occurred in March. These actions reflect the bank’s response to improving inflationary conditions in the country.
Recent data shows that Mexico’s annual headline inflation slowed to 4.66% in the first half of September, marking the fourth consecutive fortnight of declines.
More significantly, core inflation moderated to 3.95%, its lowest level since early 2021. These figures have prompted Banxico to revise its inflation forecasts downward, with expectations for annual headline inflation in the fourth quarter now at 4.3%, down from 4.4% previously.
Governor Rodriguez stated,
“We could assess the magnitude of the adjustments to the reference interest rate at our meetings going forward, given the levels of inflation that we have been observing.”
This statement suggests that the central bank may be open to more aggressive rate cuts if the inflationary trend continues to improve.
However, the path toward lower interest rates is not without uncertainty. While the market consensus, as reflected in the Citibanamex survey, unanimously points to further rate cuts, some analysts warn of potential risks.
Bank of America (BofA) noted that while the direction is clear, there are factors that could complicate the journey. These include headline inflation still being close to 5%, a tight labor market, a weakened peso, and inflation expectations remaining above 3%.
BofA expects Banxico to continue cutting rates gradually for the remainder of this year and into early 2025, potentially accelerating the pace once there is more evidence of weaker economic growth. Their projections suggest the policy rate could reach 10.00% by the end of 2024 and 8.25% by the end of 2025.
It’s worth noting that the decision to cut rates is not always unanimous among Banxico’s board members. In the latest rate cut, Deputy Governor Jonathan Heath voted to hold the rate at 10.75%, highlighting the ongoing debates within the central bank about the appropriate pace of monetary easing.
As Mexico prepares for a leadership transition, with President-elect Claudia Sheinbaum set to take office, Rodriguez asserts that the country’s first woman president will inherit an economy in a “solid position.”
She cited sustainable external accounts, a moderate current account deficit, a resilient banking system, and adequate levels of international reserves as indicators of the economy’s strength.
The central bank’s next monetary policy decisions are scheduled for November 14 and December 19, 2024.
