CORRECTED-MNI INTERVIEW: Banxico Easing Pause In Sight- Roldan

MNI (BRASILIA) - (Corrects to show Roldan's year-end rate call is 10.25%, not 10.75%)

The Central Bank of Mexico is expected to hold its overnight interbank interest rate at 10.75% in September following a 25 basis point cut this month, and indicate borrowing costs will end the year at 10.25%, the former head of monetary research at Banxico Jessica Roldan told MNI.

"For September, my current call is that they will pause because there will be a lot of noise in the national political scene and in the United States, which could trigger exchange rate depreciations and volatility," Roldan, now chief economist at Finamex, said in an interview.

In August, Banxico cut its interest rate by 25 basis point, to 10.75%, in a split decision, with Governor Victoria Rodriguez and deputy governors Galia Borja and Omar Mejia in favor of the rate cut, while deputy governors Irene Espinosa and Jonathan Heath voted to keep it at 11%. (See MNI WATCH: Banxico Hints At More Rate Cuts After Split Vote)

Roldan anticipates that the decision is likely to remain divided in September, with at least one member voting for another cut. "My year-end forecast is 10.25%, and the year-end forecast for next year is 8.75%. This is a relatively high forecast because we believe that the reduction in interest rates by the Bank of Mexico could be limited by what the Federal Reserve does," she noted.

She believes the Fed may not lower rates as much as markets expect and that, along with fiscal concerns, could lead to a decompression of risk premiums, preventing Banxico from lowering rates significantly. "That’s why the easing cycle is very gradual and still implies significant levels of restriction," she said.

MINUTES

Roldan believes the minutes from the last meeting released Thursday were "as dovish as expected," given that they stem from a rate cut meeting. However, she observed that governor Victoria Rodriguez Ceja appeared to be attempting to balance the reasons behind the decision.

The former Banxico economist pointed out that Rodriguez Ceja placed less emphasis on economic activity, listing other factors, as market participants noted a greater emphasis on growth concerns over inflation risks in the statement of the decision.

"After the decision, many people had the impression that the central bank was being very tolerant of inflation and was reacting to concerns more about economic activity, partly because that's how it has been communicated," Roldan said.

She noted that the last two statements have portrayed the inflation outlook as one of two shocks, with upward pressures from the exchange rate being countered by economic activity. "But then, with the recent statement again mentioning the balance of risks for economic activity, it seemed the central bank was very concerned about economic activity," she said.

"In the minutes, in the paragraph that we believe is from the governor, she talks about external factors, the global disinflation phenomenon that has been imported, the temporary nature of non-core inflation shocks, and among all of that, economic activity is just one more determinant," said Roldan.