MNI INTERVIEW: Banxico Set For Larger Cut That Poses Risks
MNI (BRASILIA) - The Central Bank of Mexico is likely to cut its interest rate by 50 basis points to 9.50% next week, former Banxico deputy manager of research strategy Enrique Covarrubias told MNI, though the outsized rate-cut appears premature given inflationary risks and uncertainty surrounding U.S. President Donald Trump's trade tariff policy.
"I am surprised that the Bank of Mexico is considering accelerating the pace of rate cuts at this moment," said Covarrubias, now chief economist at Actinver. "It is true that inflation is currently within the central bank's target range, but I believe there are other factors, especially external ones, that point to an environment where inflation could become challenging in the coming months."
The former Banxico economist noted that it would make more sense to continue with 25-basis-point cuts, particularly waiting for Feb. 1, when Trump's tariff threats are expected to materialize, before considering a change of course.
"Despite this highly challenging external environment, I believe the central bank wants to convince the market that there is indeed room for a 50-basis-point cut at this moment. Moreover, I think they are not only announcing these 50 basis points but also signaling an additional 25-basis-point cut in the next decision," he said.
TERMINAL RATE
He believes Banxico has room to continue cutting rates, possibly bringing them down to around 9% at some point.
"If certain conditions, particularly domestic ones, materialize, there could even be room for the terminal rate to reach 8.5%. However, this remains highly uncertain, and reaching such a low terminal rate would be difficult unless various factors align."
Last month, Banxico decided to cut rates by 25bps to 10.00% and signaled further reductions next year, potentially including larger cuts. (See MNI WATCH: Banxico Signals Larger Cuts Next Year)
Covarrubias said the Federal Reserve’s monetary policy stance is key to Banxico’s next steps. "It’s not that Mexico conducts monetary policy solely based on what happens in the U.S., but our economic cycles are highly integrated," he said. The Fed held interest rates steady this week, wanting see more progress on inflation before additional cuts.
DOVISH BOARD
Next week, Banxico's board will meet to decide its next policy move with one less member, as Deputy Governor Irene Espinosa’s term ended at the end of last year, and the government has yet to nominate a replacement.
"Irene Espinosa was clearly the most hawkish voice on the board. Her departure not only automatically makes the board less hawkish but also removes a key counterbalance if there were any internal voting blocs," Covarrubias said. "It’s normal to expect a dovish decision next -- dovish compared to the previous decision, and also dovish in relation to what is happening globally, especially with the Federal Reserve."
TRUMP TARIFFS
He pointed out that Trump's proposals are potentially inflationary, though possibly more so for the United States than Mexico. "His goal is not to harm Mexico but to benefit U.S. companies in both the short- and long-term, strategically positioning the U.S. economy in a geopolitical context."
In the short run, he expects high uncertainty, particularly affecting investment projects in Mexico.
Certain Mexican sectors, however, particularly those linked to intermediate manufacturing, are unlikely to face aggressive tariffs without also hitting American firms. "Some strategic sectors in Mexico may therefore emerge relatively unscathed from these negotiations."