MNI BANXICO WATCH: More Cuts Coming While Core Inflation Falls

MNI (BRASILIA) - The Central Bank of Mexico once again indicated its monetary easing cycle will continue at upcoming meetings after lowering the overnight interbank interest rate by 25 basis points to 10.25% Thursday, noting that core inflation shows improvement.

"Looking ahead, the Board expects that the inflationary environment will allow further reference rate adjustments. It will consider the prospects of global shocks continuing to fade and the effects of weakness in economic activity," the statement stressed.

This was the third consecutive rate reduction and the first unanimous decision since May. Banxico’s September decision, when it cut the interest rate by 25 basis points to 10.50%, saw one dissent, with Deputy Governor Jonathan Heath favoring maintaining borrowing costs at 10.75%. (See MNI INTERVIEW: Banxico To Continue Easing Through 2025-Tapia). 

INFLATION REBOUNDED

While annual headline inflation rebounded to 4.76% in October from 4.58% in September, the board attributed the increase to supply shocks that have affected the non-core component. "Core inflation, which better reflects inflation’s trend, continued decreasing and registered 3.80% in October," the statement added.

"The inflation outlook has been improving after the significant shocks caused by the pandemic and the war in Ukraine. The behavior of core inflation reflects this improvement," Banxico said. (See MNI POLICY: Even Banxico Hawks Accept Inflation Projections)

The decision was in line with market expectations, though a minority of analysts had bet on a hold due to the peso’s depreciation following Donald Trump’s election victory last week. (See MNI: Latam Policymakers Concerned About US Elections at IMF)

PESO WEAKNESS

The peso’s weakness, with losses of around 2% since last Wednesday, was considered "orderly" by the board, requiring no monetary policy response or FX intervention.

"The Mexican peso depreciated markedly and registered volatility mainly in response to the effects of the electoral process in the United States. Nevertheless, financial markets have exhibited relatively orderly behavior," the document said.

MNI reported earlier this month that Mexico would only intervene in foreign exchange markets if the peso’s depreciation became disorderly, and any intervention would not aim to prevent depreciation but would be triggered only by significant disruptions to market functioning, as there is no specific exchange rate target. (See MNI POLICY: Mexico FX Intervention Only Amid Market Disorder)

ACTIVITY

Banxico highlighted that, during the third quarter of 2024, according to preliminary information, "domestic productive activity would have grown at a higher rate than in the previous three quarters, when it remained practically stagnant."

They expect that activity will show a lack of dynamism in 2025. "As for the labor market, employment slowed down. The balance of risks to economic growth remained biased to the downside," the statement said.