MNI INTERVIEW: Banxico Declared Victory Too Soon - Alatorre

Mexico's central bank might have declared premature victory in the fight against inflation as it kickstarted a new monetary easing cycle Thursday by cutting interest rates by 25bp to 11.00%, the former deputy director of macroeconomic analysis at the Ministry of Finance and Public Credit, Eugenio Gomez Alatorre, told MNI.

He said the decision to offer no concrete forward guidance on the direction of rates is an effort to create "more room for maneuver."

"I'm concerned that the central bank may have declared victory too soon and that the process of converging inflation to the 3% target may become complicated," Alatorre, now a professor at Universidad Panamericana, said in an interview.

"Underlying inflation has decreased solely due to its goods component, and we don't know when service inflation will begin to decline. If we're lucky, it will start decreasing soon, but I think it's likely to take time to decrease, and then underlying inflation won't drop below 4%. I think Banco de México may face inflation stopping its decline shortly after lowering the reference rate," he highlighted.

The rate cut faced one dissent from a member, Irene Espinosa, who voted to keep borrowing costs on hold. "I believe the disagreement will continue. Espinosa thinks the rate should not have been lowered now and will hardly be in favor of lowering it in the next meeting, unless the inflation data is very good, which is unlikely. I think the decision could even be more divided," Alatorre opined.

LACK OF GUIDANCE

Regarding the lack of guidance, the former official believes Banxico wants more freedom to make a decision at each meeting. (See MNI BANXICO WATCH: Easing Cycle Strictly Data Dependent)

"It's likely that they may need to pause the rate cuts. In other words, we haven't necessarily entered into a continuous rate-cutting cycle because the reduction in inflation could lose momentum. I think the board is considering that their next decision will heavily depend on the information that becomes available," he evaluated.

He emphasized that the central bank will continue lowering interest rates as long as inflation continues to decrease, which is not guaranteed. "There will be six monetary policy decisions remaining in the year. I don't think they'll cut more than 25 basis points in each one, and they may not cut the rate at every meeting. I would think the rate could close the year at a level of 9.75% or 10%," he noticed.

The professor said the tone of Fed decisions likely influences Banxico at the margins but "I don't think it was a determining factor in the decision."