MNI BANXICO WATCH: Easing Cycle Strictly Data Dependent

Mexico's central bank initiated a new monetary easing cycle Thursday, cutting interest rates by 25bp, to 11.00% as expected but offering no clear clues into next policy steps in a statement that suggested policymakers will be strictly guided by data without prejudging the outcome of future meetings.

For the next meetings, the board said it will "thoroughly monitor inflationary pressures" and expectations, signaling that it will "make its decisions depending on available information." The rate cut faced one dissent from a member who voted to keep borrowing costs on hold.

Former senior economist at Banxico Alberto Armijo told MNI recently the monetary authority is becoming more data dependent after a dovish tilt in its February policy statement opened the door to interest rate cuts, putting even more weight than usual on upcoming inflation figures. (See MNI INTERVIEW: Dovish Banxico More Data-Dependent-Ex-Economist)

Banxico is looking closely at progress in the inflation outlook and the "challenges that prevail". It will also "consider the incidence of both the restrictive policy stance that has been maintained and that prevailing in the future on inflation throughout the horizon in which monetary policy operates," the committee said.

The meeting minutes, which will be released April 4th, might offer more clarity on the board members' debate about how to communicate their next steps. The main concern is how direct expectations correctly while preserving room for maneuver. Formulating solid forward guidance in a divided board could prove challenging. (See MNI POLICY: Banxico Set To Discuss Forward Guidance)

The statement highlighted that annual inflation, which had increased at the end of 2023 and in January, slipped in February to 4.40%. "This decline reflected a slight reversion exhibited by the non-core component, which had been exerting pressure on it. Moreover, core inflation continued decreasing, registering 4.64% in February," the board said, adding that expectations also for year-end inflation have also recently eased.

"Those for longer terms remained relatively stable at levels above target," Banxico said.

DESINFLATION TO CONTINUE

In this context, Mexico's central bank expects the disinflation process to continue. "Actions will be implemented in such a way that the reference rate remains consistent at all times with the trajectory needed to enable an orderly and sustained convergence of headline inflation to the 3% target during the forecast period. The central bank reaffirms its commitment to its primary mandate and the need to continue its efforts to consolidate an environment of low and stable inflation.

Governor Victoria Rodriguez as well as deputies Galia Borja, Jonathan Heath, and Omar Meija voted in favor of the cut, while Irene Espinosa preferred to keep rates on hold. The board signaled in February it would assess the possibility of reducing rates in coming meetings. (See MNI INTERVIEW: Banxico Should Be Cautious On Rate Cuts-Guzman)