Banxico maintains rate-cut cycle despite inflation rebound in Mexico
Mexico’s central bank (Banxico) cut its benchmark interest rate by 25 basis points to 7.50% in a decision approved by a majority of the governing board. Markets expect further reductions despite the rebound in headline inflation.
The measure was expected by analysts, according to the most recent Citi survey. With this reduction, Banxico has accumulated 10 consecutive cuts, the last two by a quarter of a point. As with the announcements in June and August, the only dissenting vote was from Deputy Governor Jonathan Heath.
“There were no surprises with Banxico. Given the monetary authority’s current stance, continued cuts are expected. The expectation is that they will be the same, 25 basis points, in the remaining two meetings, so that the funding interest rate closes at 7.0%,” James Salazar, deputy director of financial research at CI Banco, told BNamericas.
The decision drew attention because inflation has been rising in recent weeks. Statistics agency Inegi reported that prices had accelerated for three consecutive two-week periods, reaching 3.74% year-on-year in the first half of September.
In its monetary policy guidance, Banxico stated that “going forward, the Governing Board will consider additional cuts to the reference rate. It will take into account the effects of all determinants of inflation.”
It added that “the actions implemented will ensure that the benchmark rate is consistent, at all times, with the trajectory required to foster the orderly and sustained convergence of headline inflation to the 3% target within the expected horizon.”
Gabriela Siller, director of financial analysis at Grupo Base, stated in a report that “with this cut, the ex-ante real interest rate stands at 3.70%, just 10 basis points above the high end of the range considered neutral, which runs from 1.8% to 3.6%.”
“Placing the interest rate within the range implies that monetary policy is neutral, that is, it neither stimulates nor restricts economic activity, something that is only appropriate when inflation risks are balanced and the 3% target is being consolidated,” the analyst added. However, she cautioned that “currently, inflation risks are skewed to the upside.”
Salazar noted that “there are elements for and against the central bank continuing to lower the rate.”
“The main argument against is that, strictly speaking, inflation has long been above the 3.0% target (this year the annual rate would close near 4.0%). Banxico’s main argument is that medium- and long-term expectations remain anchored and without strong short-term pressures, so it would be appropriate to continue,” he explained.
On September 17, the U.S. Federal Reserve also implemented a 25-basis-point rate cut, its first since December and the first under the Donald Trump administration, who has pressured Jerome Powell to ease monetary policy to support economic growth.
