MNI INTERVIEW: Banxico Opens Door To Further Rate Cuts -Armijo

MNI (MEXICO CITY) - Mexico's central bank is laying the groundwork to cut interest rates at each of its three remaining meetings this year, though a November pause to assess the effects of two previous reductions on the economy cannot be ruled out, former senior Banxico economist Alberto Armijo told MNI.

"Considering the messages from the minutes and the Quarterly Report, I believe Banxico has opened the door to rate cuts at each of the remaining meetings this year, with the possibility of a pause in November to see the effects of the two cuts," said Armijo, now chief economist at a large investment fund, in an interview.

He believes that risks from exchange rate depreciation and agricultural shocks might force Banxico to slow the pace of cuts in the first quarter of next year. (See MNI INTERVIEW: Lower Rates With Disinflation- Banxico's Mejia)

"The magnitude of agricultural shocks and their consecutive occurrence over roughly seven months leaves the risk of a pass-through to other sectors, so the risk of a future pass-through from non-core to core inflation is certainly present," the former Banxico economist stressed.

Annual INPC inflation jumped to 5.57% in July from 4.98% in June, in a fifth consecutive increase after a steady decline from a peak of 8.70% in 2022 to a low of 4.40% in February. However, the core measure fell to 4.05% from 4.21%, the lowest since April 2021, continuing the downward trend seen since the start of 2023.

"The pass-through will also depend on how the economy slows down, as these two effects can offset each other," Armijo said. 

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"In recent weeks, we’ve seen an increase in the interest rate curve, particularly at the longer end, due to the idiosyncratic shocks, which has led to a depreciation of the exchange rate. Despite Banxico’s efforts to convey this message to analysts, the market has responded with higher rates due to the increased risk premiums they have to pay," he noted.

Last month, Banxico cut its interest rate by 25 basis points to 10.75% in a split decision, with Governor Victoria Rodriguez and Deputy Governors Galia Borja and Omar Mejia in favor of the cut, while Deputy Governors Irene Espinosa and Jonathan Heath voted to hold at 11%.

"The August cut was a surprise for most analysts, and I believe the cut was made in a context that was ambiguous in relation to the bank’s prior communication," Armijo said.