MNI BANXICO WATCH: Banxico Set To Initiate Easing Cycle

The Central Bank of Mexico is set to reduce its overnight interbank interest rate by 25 basis points to 11.00%, on Thursday, commencing an easing cycle after seven meetings during which it held borrowing costs unchanged.

Banxico board members will also debate how to communicate their next steps, and to direct expectations correctly while preserving room for maneuver, as MNI has previously reported. (See MNI POLICY: Banxico Set To Discuss Forward Guidance)

Several board members have said there is a need to adjust the level of monetary tightening after inflation dropped significantly over the last year. Banxico’s former manager for monetary research Jessica Roldan told MNI recently that minutes from February’s meeting reinforced expectations that a rate-cutting cycle is likely to begin in March. (See MNI INTERVIEW: Banxico Minutes Reinforce March Rate Cut-Roldan)

In February, Banxico decided unanimously to maintain its interest rate at 11.25%, but dropped an earlier commitment to keeping policy steady for "some time" and instead stated policymakers will assess the possibility of adjusting their restrictive policy stance, depending on progress towards its 3% inflation target. (See MNI INTERVIEW: Dovish Banxico More Data-Dependent-Ex-Economist)

INFLATION DROP

Following a three-month upward trend, inflation decelerated in February, dropping from 4.88% in January to 4.40%, after a peak of 8.7% in August 2022. The data increased expectations of a 25bp rate cut this month.

But during a virtual presentation of the central bank's quarterly economic update last month, some board members showed heightened concern about a potential resurgence of inflation. Deputies Jonathan Heath, formerly viewed as dovish, and Irene Espinosa, pointed to risks and emphasized the importance of basing decisions on available data.

Deputy Omar Mejia and Governor Victoria Rodriguez, on the other hand, emphasized significant disinflation over the past year, and asserted that the real rate of interest was elevated and required adjustment. Deputy Governor Galia Borja mentioned improvements to the inflation outlook but stressed the need for prudence and caution. All participants reinforced the relevance of maintaining a restrictive monetary policy. (See MNI INTERVIEW: Banxico Should Be Cautious On Rate Cuts-Guzman)