Mexico City.- The cut made by the Bank of Mexico (Banxico) to the reference interest rate, despite the rise in inflation expectations, may put the reputation of the central bank at risk, analysts considered.
Banxico today cut its interest rate by 25 basis points, to 10.75 percent, in a vote divided both by the members of its Governing Board and by market and analyst expectations.
“It is very striking that the Bank of Mexico itself cut the interest rate, but it also raises inflation expectations; there are downside risks such as economic slowdown, but it is clear that the non-core component is having an effect on expectations and, above all, it is generating greater pressures,” said Gabriela Siller, director of analysis at Banco Base.
“I think this interest rate cut could be risky because the Bank of Mexico could start to lose its reputation, and this is very important, because one of the main channels of transmission of monetary policy in Mexico is expectations.”
Siller added that amid financial turmoil and a volatile exchange rate, this could be reflected in greater pressures on inflation, in addition to the fact that this year there is a high budget deficit, which has also caused inflationary difficulties in Mexico in the past.
“It seems that the Bank of Mexico is being less restrictive not only because of today’s cut, but because it could also continue cutting for the rest of the year and thus end with an interest rate of perhaps 10.00 or 10.25 percent, which would be a less restrictive monetary policy due to a lower nominal interest rate and the increase in inflation expectations.
“The next rate cut was expected after the first rate cut by the Federal Reserve, in September. That’s why it’s causing a bit of confusion, and I think the biggest source of confusion is that there is a rate cut, while inflation expectations are being revised upwards,” Siller said.
Citibanamex analysts, on the other hand, considered the cut in the reference interest rate in the midst of rising inflation to be an “inconsistent” decision.
“We believe that this was a correct decision given the macroeconomic outlook, but inconsistent in the way in which the cut was justified. The Board kept its forward guidance unchanged, stating that ‘going forward it expects that the inflationary environment will allow for discussion of adjustments to the reference rate.’
“In our opinion, the above and the ‘dove’ tone of the statement imply that the Board would opt to make continued cuts of 25 basis points for the remainder of the year, to close at 10.00 percent,” agreed the Economic Studies area of Citibanamex in a timely note.
According to Citibanamex analysts, Banxico acted inconsistently because it used the good performance of underlying inflation as an argument for the cut, a fact that would have justified not interrupting the cycle of cuts in May and June.
“This time they downplayed the rise in non-core inflation, describing it as ‘the most volatile’, and also the sharp depreciation of the exchange rate that occurred this week (the latter did not happen in the previous decision).
“While we agree that these factors should not have so much weight in monetary policy decisions, it was precisely these facts that led Banxico to pause its cycle of cuts,” the area stated.
Citibanamex analysts maintained their estimates for the interest rate at the end of 2024 and 2025 at 10.00 and 8.00 percent, respectively.
Banorte believes the rate cut is appropriate
Grupo Financiero Banorte considered the cut in the reference interest rate made by the Bank of Mexico to be appropriate.
Alejandro Padilla, chief economist and deputy general manager of analysis at Banorte, said that when observing the dynamics of inflation in Mexico, he highlights that many of the inflationary pressures, especially in non-core inflation, are due to fruits and vegetables, as well as energy, which are generally the most volatile components of inflation, so at some point they will have to revert to their mean.
“When we look at underlying inflation, which is the most stable, the news has been quite positive. We have seen underlying inflation continuing to trend downwards in annual terms, especially in the merchandise sector, but also with some positive news in the services sector.
“So, I think that what we will be able to see going forward is that inflation will gradually converge to a level much closer to the central bank’s target and that is why we consider that the 25 basis point cut announced today by the Bank of Mexico was appropriate,” the executive said.
A cut in the reference interest rate has a positive effect on the economy, especially on consumption, credit and also on investment, Padilla stressed.
“Mexico is still in a restrictive monetary stance. Even so, this 25 basis point cut may contribute to a better dynamic of internal demand; this may also help to lower financing costs not only for consumers, but also for companies and all economic agents.
“Overall, it could have a clear positive effect on the economy, depending on how effective this monetary policy transmission channel can be. I think that going forward, if we had more interest rate cuts, this effect could be a little more evident,” he added.
Banorte had an interest rate expectation for the end of the year of 10.50 percent and has now adjusted it to a level of 10.25 percent.
“We have added one more cut to the path we have planned and we think that an important factor in this change has been the narrative of the US central bank (Fed). We believe that it will be cutting in the following meetings starting in September and that will give room for maneuver to the Bank of Mexico and other central banks to be able to cut their interest rates even further.”
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