MNI BANXICO WATCH: Decision Likely to Split On Hold Or Cut

MNI (BRASILIA) - The previous consensus expectation for a 25-basis-point cut by the Central Bank of Mexico at its meeting on Thursday has dissipated in the wake of recent extreme market volatility, with investors now divided over whether it will hold rates steady and a high likelihood of another split decision.

The Board's statement after holding its overnight interbank interest rate at 11% for a second consecutive meeting in June suggested that inflationary trends might soon justify discussions of rate cuts, while minutes showed that Deputy Governor Omar Mejia said policymakers should not place excessive weight on accelerating non-core prices. MNI had understood that the argument presented by Mejia, who dissented in favor of a 25bp cut, was gaining ground within the Board.

But concerns over peso weakness and other risks already suggested that any decision to ease would be likely be the result of another split decision, and these will only have intensified following recent days’ exchange-rate swings. The peso weakened to a low of 20 to the dollar on Monday, amid rising fears of a U.S. recession and a sharp unwinding of yen-funded carry trades hitting emerging-market currencies, before recovering to 19.20. (See MNI POLICY: Banxico Leans Toward Cut As Core Inflation Falls)

CORE INFLATION DECLINES

In interviews in July, former Banxico Deputy Governor Javier Guzman told MNI the central bank had clearly signaled a 25-bp cut in August, though he saw two members out of five voting to hold. Former Deputy Manager of Research Strategy Enrique Covarrubias earlier said he expected two more cuts this year, also with an increased risk of a split vote at the upcoming meeting. (See MNI INTERVIEW: Banxico Set To Cut Rates, Likely Split - Guzman and MNI INTERVIEW: Banxico Likely To Cut Twice In 2024-Covarrubias)

While annual INPC inflation jumped to 4.98% in June from 4.69% in May, interrupting its decline from a 2022 peak of 8.70%, core inflation fell to 4.13%, the lowest since April 2021 and continuing the downward trend seen since the start of 2023, according to the Mexican National Institute of Statistics and Geography. Banxico targets inflation of 3%.