MNI INTERVIEW: Banxico Needs Better Data For More Cuts-Sanchez

Mexico's central bank should wait for better inflation trends to continue cutting interest rates, former deputy Banxico governor Manuel Sanchez told MNI, adding the board must ensure prices are on a clear and sustainable path toward the 3% target.

Sanchez believes the monetary authority should stay cautious over its coming meetings, but is likely to cut again before long. "It can't be ruled out that Banxico might soon continue with a cycle of rate cuts. Decisions could be made by majority, with one or two dissenters," he said in an interview.

"For several months, both general inflation and core services inflation have shown rigidity in declining. The latter reflects aggregate demand pressures, which, in principle, should be countered by monetary policy through maintaining a strong stance", added Sanchez, now an economic advisor to Spruceview.

Banxico decided unanimously to maintain its interest rate at 11% this month, after a 25 basis point cut in March. The former deputy stressed that the minutes of that decision indicated that it would be a one-time move to adjust the real level of its official rate. (See MNI INTERVIEW: Banxico Should Have Begun Easing In '23-Werner)

"In March, several board members justified the rate cut as a one-time move, not implying the start of a rate-cutting cycle. Cutting in June would contradict the 'forward guidance' given then, contributing to the frequent confusion in Banxico's messages and weakening the effectiveness of monetary policy," Sanchez said.

CONVERGENCE POSTPONED

In the May meeting, Banxico postponed again the forecasted convergence of inflation to the target, now expected for the fourth quarter of 2025, Sanchez said. In March, the expectation was for that to happen in the second quarter of 2025.

"Further easing, without substantial disinflationary progress, would send a message of complacency regarding its commitment to the goal," argued Sanchez.

The average annual inflation over the last seven years and four months has been 5.3%, up from 3.6% in the previous seven years, he noted. "This suggests a higher inflation regime shift, which poses the danger of contaminating inflation expectations. Neglecting this would make convergence to the target more difficult," he said. (See MNI BANXICO WATCH: No Hint Of More Easing After Standing Pat)

The former official argued that inflation has recently deviated from the target. in April 2024 it was 4.7% and in the first half of May 2024, it rose to 4.8%.

"It seems that the board is more concerned with the level of the ex-ante real rate than with the potential long-term entrenchment of high inflation and the chronic lack of convergence to the target," he said.

Lately, the Federal Reserve has become more hawkish, leading the market to expect fewer rate cuts to this year, which has impacted emerging countries' monetary policy to remain cautious. "Possibly the firm stance of the Fed, contrasting with Banxico's wavering stance, is the main inhibitor of its willingness to ease more quickly," opined Sanchez. (See MNI INTERVIEW: Fed Risks To ECB Easing-German Experts Chair)