MNI INTERVIEW: Banxico Set To Cut Rates, Likely Split - Guzman

Mexico's central bank has clearly signaled its intention to cut interest rates by 25 basis points at its meeting in August, former Banxico deputy governor Javier Guzman told MNI, suggesting that the decision is likely to be split, with three members in favor of reducing borrowing costs and two voting to maintain at 11%.

Last month, Banxico maintained its overnight interbank interest rate at 11% for a second consecutive meeting, with Deputy Governor Omar Mejia dissenting in favor of a 25-basis-point cut. The board's statement indicated that the inflationary environment might warrant discussions on rate cuts in future meetings. In minutes released last week, Mejia emphasized that policymakers should not overly emphasize changes in non-core inflation, which have little impact on monetary policy.

"The statement sends a clear message that there is a majority on the board inclined to cut rates soon, and soon means at the next meeting. The minutes essentially confirm this," Guzman said in an interview. (See MNI INTERVIEW: Banxico Likely To Cut Twice In 2024-Covarrubias)

Guzman said the minutes also indicate the decision is likely to be split. "The minutes reveal that three board members lean towards rate cuts, with two strongly advocating for easing at the next meeting. Another member is less assertive but open to reducing the interest rate," he stressed.

He pointed out the conditions set by the other two members for lowering borrowing costs in August "are unlikely to be met" by then. "I expect it to be a split decision, with a data-dependent outlook, waiting for ongoing information to emerge," he said.

DATA DEPENDENT

Guzman believes the central bank should be more data dependent amid increasing uncertainty. "Personally, I wouldn't signal at this moment that we are lowering the rate. I would adopt a cautious approach and make decisions contingent upon incoming data," he remarked.

"The risk is that by preemptively signaling, they might inadvertently validate analysts' inflation expectations. Analysts currently interpret that it's clear most board members intend to lower the rate. However, it's crucial to note that analysts' inflation expectations currently exceed those projected by the central bank.”

The former Banxico deputy highlighted uncertainties over the coming year, including doubts about the new government's economic policies, a potential economic slowdown, the upcoming U.S. presidential elections, and their impacts on monetary policy. "I think that interest rates will continue to decline next year, but determining the exact level is much more challenging," he observed.

According to the latest Bank of Mexico survey, which indicates analysts expect an interest rate of 10.25% by year-end, Guzman commented that that "seems excessively low given the challenging scenario we face."

"If the Federal Reserve were to lower interest rates in September, it would certainly ease the situation for Banxico. While not the sole determinant, it would certainly facilitate matters," he concluded. (See MNI INTERVIEW: June CPI Seals Deal For Sept. Fed Cut-Tilley)