MNI INTERVIEW: Banxico Minutes Reinforce March Rate Cut-Roldan

Minutes from the Mexican central bank's latest meeting released Thursday reinforced the expectation that an interest rate-cutting cycle is likely to begin at the board's next gathering in March, the former manager of monetary research at Banxico, Jessica Roldan, told MNI.

"For some time now, precisely four and a half months, we have considered that the first rate cut could materialize in March. The minutes, from our perspective, reinforce this expectation," Roldan, now the chief economist at Finamex, said in an interview.

She highlighted that the majority on the board already sees room to reduce Mexico's interest rate, which has been at 11.25% since March of 2023.

"Reviewing their arguments, I believe the only significant reason that would force them to postpone that first adjustment is if the underlying component of inflation surprises them significantly to the upside, in the two inflation readings that will be known before the next decision. This, or some new shock that may arise," Roldan said.

CORE FOCUS

The discussion in the minutes also revealed a greater desire among policymakers to make a clear distinction between the core and non-core components of inflation, she said.

"According to our forecasts, core inflation will continue to decline -- at a much more gradual pace than before," she said. (See MNI INTERVIEW: Dovish Banxico More Data-Dependent-Ex-Economist)

In her view, monetary restraint is already excessive and fails to acknowledge improvements in core inflation seen during much of the second half of last year.

"I see as appropriate for the monetary authority to adjust the reference rate downwards. However, I believe a very important challenge will be communication. The central bank's inflation forecasts are still very optimistic, and we believe that inflation may continue to rebound due to the non-core component in March and the second quarter of the year," Roldan said.

"Making cuts when the inflation trend worsens [although temporarily], and authorities are forced to revise their projections upward is complicated. They must be careful not to appear complacent," she added.

As of mid-February, Mexico's inflation rate had eased to an annual rate of 4.45%, while core prices were up 4.63%.

THE FED EFFECT

The former official mentioned that the Federal Reserve's decision may be more important for Banxico's moves than officials might want to admit. (See MNI INTERVIEW: Banxico Should Be Cautious On Rate Cuts-Guzman)

"Since it is practically ruled out that the Fed will move in March, I don't see any impact for the next decision. But I do believe that, in the second half of the year, the reductions made in Mexico will be largely conditioned by what the Fed does. That is, I don't see room for the short-term rate differential between Mexico and the U.S. to decrease significantly," she said.

On Thursday, Banxico meeting minutes showed the board keeping to the same message it offered at the decision itself -- it would assess the possibility of reducing borrowing costs starting at its next policy meeting, in March.

"In the next monetary policy meetings, [the board] will assess, depending on available information, the possibility of adjusting the reference rate," the report said.