MNI BANXICO WATCH: Signaling More Cuts Due To Disinflation

MNI (BRASILIA) - Mexico's central bank intensified its signal of possible further rate cuts in the coming meetings after lowering its overnight interbank interest rate by 25 basis points to 10.50% Thursday, stating that the inflationary environment "will" make room for more reductions.

"Looking ahead, the board expects that the inflationary environment will allow further reference rate adjustments," the bank said in a statement. The board replaced "may allow," used in previous documents, with "will allow," indicating a strong likelihood of additional cuts.

The decision was not unanimous, with Governor Victoria Rodríguez and Deputy Governors Galia Borja, Omar Mejia, and Irene Espinosa supporting the rate cut, while Deputy Governor Jonathan Heath voted to maintain borrowing costs at 10.75%.

Banxico considered the nature of shocks affecting non-core inflation, which it expects will continue to dissipate over the next few quarters. "It took into account core inflation’s trajectory and the fact that it is anticipated to continue decreasing," the statement said.

REDUCE LEVEL OF RESTRICTION

The board noted that while the inflation outlook still requires a contractionary monetary policy stance, the evolving conditions suggest "it is adequate to reduce the level" of restriction. Banxico expects headline inflation to converge to the 3% target in the fourth quarter of 2025.

Earlier this month, Mejia anticipated to MNI that the board should consider reducing the level of monetary policy restriction due to progress in disinflation, warning that excessively high interest rates for too long could distort markets and the economy. (See MNI INTERVIEW: Lower Rates With Disinflation- Banxico's Mejia)

Last month, Banxico also cut its interest rate by 25 basis points to 10.75% in a split 3-2 decision. At that time, Espinosa joined Heath in voting to hold rates steady.

The recent statement highlighted that expectations for headline inflation at the end of 2024 were revised upward, while expectations for core inflation decreased.

"Annual headline inflation decreased from 5.57% in July to 4.66% in the first half of September due to a partial reversal in the supply shocks that have affected the non-core component. In addition, core inflation continued trending downwards, registering 3.95% in the first half of September," the statement noted.

ACTIVITY WEAKNESS

Still, regarding the rationale for the rate cut, Banxico emphasized that economic activity is experiencing a period of weakness amid high uncertainty from both external and domestic factors. The statement also briefly mentioned the Federal Reserve's larger-than-expected first rate cut of 50 basis points last week.

"As for the labor market, employment has slowed. The balance of risks to growth remains tilted to the downside," Banxico added.

Heath's reasoning for voting to hold rates will be detailed in the minutes of the meeting, to be released Oct. 10.