MNI INTERVIEW: Banxico Likely To Cut Twice In 2024-Covarrubias

Mexico's central bank is likely to cut its interest rate two more times this year, former Banxico deputy manager of research strategy Enrique Covarrubias told MNI, adding he sees an increased risk of a split vote at the upcoming August meeting.

"Despite the concerning inflation data, there still seems to be a window of opportunity in August to cut rates. I believe it would be the right move if the opportunity arises, in addition to following the Federal Reserve when similar opportunities emerge," said Covarrubias, now the chief economist at Actinver.

"We believe rates could be cut twice this year — once in either August or September and again in December, following the Federal Reserve."

Mexico's annual INPC inflation stood at 4.98% in June, surpassing the 4.87% consensus forecast and up from 4.69% in May. However, core inflation was 4.13%, below the 4.21% consensus. (See MNI INTERVIEW: Banxico Needs Better Data For More Cuts-Sanchez)

Last month, Banxico maintained its overnight interbank interest rate at 11% for the second consecutive meeting, with Deputy Governor Omar Mejía dissenting in favor of a 25 basis point rate cut. The board's statement indicated that the inflationary environment might allow for discussing rate cuts at upcoming meetings.

MOUNTING DIVISIONS

Covarrubias believes that the dissenting vote came to prepare the market for further cuts. "It appears that three board members, including Governor Victoria Rodríguez Ceja, think that any opportunity to cut rates should be taken," he noted.

"We might see a split vote at the next decision, with three members voting to cut rates and two members opposed. It's also important to remember that Deputy Governor Irene Espinosa's term ends at the end of this year," added. Espinosa is considered the most hawkish member of the board.

He pointed out that the weakness of the Mexican peso and a resurgence of headline inflation could hinder rate cuts, despite the positive trajectory of core inflation.

FED IMPACT

Covarrubias emphasized the tight correlation between the Mexican and U.S. economic cycles. "When inflation is above 3%, as it currently is, the central bank maintains a rate differential with the United States that has historically been around 575 basis points, plus or minus 50 basis points. This rule applies almost 100% of the time when inflation exceeds 4%," he explained.

Currently, the interest rate differential between Mexico and the United States falls within this range. "While the Federal Reserve is not the primary driver of Mexican monetary policy, its actions provide Banxico with critical information to make optimal rate adjustment decisions," Covarrubias said.