MNI INTERVIEW: Banxico To Continue Easing Through 2025 - Tapia

MNI (BRASILIA) - The Central Bank of Mexico looks set to maintain a gradual and continuous monetary easing cycle through next year, former Banxico economist David Tapia told MNI, likely delivering another 25 basis point interest rate cut in November.  

The board will closely monitor the evolution of inflation and economic activity, he added.

"Banxico will likely maintain a gradual and continuous rate-cutting cycle. For November, another 25 bp cut is expected, as long as inflation continues on a downward trend and no significant external shocks or additional supply-side pressures arise," Tapia, currently the chief economist at a large Mexican pension fund, said in an interview. (See MNI BANXICO WATCH: Signaling More Cuts Due To Disinflation)

Tapia noted an additional 25 bp cut in December is possible, ending the year with a target rate of 10%. "In 2025, the focus will shift more toward the relative position with the Federal Reserve, which could bring the interest rate down to levels close to 8%, depending on inflation trends and exchange rate stability," the former Banxico economist emphasized.

ESPINOSA'S REPLACEMENT

A relevant factor to consider is the exit of deputy governor Irene Espinosa, known as the most hawkish member, from the board in December, as her succession could change Banxico’s dynamics, he pointed out. "We might see a more dovish tilt, which could accelerate the pace of cuts in 2025," Tapia added.

Last month, Banxico cut its interest rate by 25 bps to 10.50%, with deputy governor Jonathan Heath dissenting to maintain borrowing costs at 10.75%. "Inflation has shown a sustained slowdown, especially in the core component, but the central bank continues to act cautiously due to persistent inflationary risks and global volatility," Tapia said.

In his view, upcoming decisions are likely to remain divided, especially given the context of both domestic and external uncertainty.

"Jonathan Heath has been consistent in pointing out that, although inflation has decreased, there are still significant risks, particularly with core inflation and potential upward pressures on service prices," he highlighted.

The argument behind Heath's dissenting vote will be detailed in the minutes to be released next Thursday.

"He will possibly focus on the need for a more cautious approach, considering that the convergence to the 3% inflation target still faces obstacles. Heath will probably emphasize that faster cuts could generate additional inflationary pressures and increase the peso’s vulnerability to external factors," Tapia said.

FED CUT

The recent deeper-than-expected 50 bp cut by the Federal Reserve opened space for Banxico to maintain its pace of rate cuts, but not necessarily in a more aggressive way, he added.

"The rate differential between the two countries is key to maintaining exchange rate stability, so a faster pace of cuts by Banxico could put pressure on the peso. However, if the Fed continues with significant cuts and local inflation remains under control, we could see Banxico cutting faster than anticipated. I wouldn’t rule out 50 bp cuts by Banxico during the first months of 2025," concluded.