MNI INTERVIEW: Banxico To Cut 25BP Despite Inflation Risks
MNI (BRASILIA) - The Central Bank of Mexico is likely to cut its policy rate to 10% on Thursday, in its fourth consecutive 25-basis-points reduction, former deputy director of macroeconomic analysis at the Ministry of Finance and Public Credit Eugenio Gomez Alatorre told MNI, though he said the easing cycle began prematurely with inflation well above target despite a weak economy.
"I believe Banxico will cut the rate by 25 basis points. The institution is clearly in a rate-cutting cycle, and there’s no reason to expect anything different," Alatorre, now a professor at Universidad Panamericana, said in an interview.
"The monetary easing cycle is premature. Inflation remains well above the central bank's target, and there is no guarantee it will converge to that target," he added.
"While it is true that core inflation has been declining, it is still above the target, and reaching 3% depends on either a sustained slowdown in the growth of service prices or goods inflation falling significantly.”
PRICE DROP NOT CERTAIN
Alatorre stressed that it is uncertain that prices will drop as rates fall.
"It is too soon to declare victory, and we could face an unpleasant surprise," he commented, adding that an eventual failure to converge on the target could potentially bringing the easing cycle to an early end.
"It depends on how inflation evolves. That’s why I’m hesitant to make a forecast for the terminal rate,” he said.
The relationship with the U.S. under President-elect Donald Trump, who has pledged to impose 25% tariffs on goods from Mexico and Canada, also adds to uncertainty. (See MNI INTERVIEW: Moody's Monitors Mexico Fiscal Efforts, Peso)
"Some of Trump’s proposed economic policies could create inflationary pressures in the U.S. Tariffs are clearly inflationary, but the proposal to deport immigrants could also lead to higher inflation. The Federal Reserve would likely respond with higher rates than it otherwise would, which would pressure Banxico to keep rates higher to avoid capital outflows and peso depreciation," Alatorre said.
PESO'S DEPRECIATION
Even with the recent sharp depreciation of the peso, he thinks the central bank will continue the easing cycle.
"It seems like nothing can stop Banxico from cutting rates. If they haven’t been concerned about being far from the target, I doubt depreciation would worry them either," the professor noted. "Moreover, currency depreciations have shown a moderate effect on prices recently.”
Alatorre does not see Mexico’s fiscal policy as inflationary.
"Growth is very weak and will likely turn negative next year, though this is due to heightened uncertainty and risks caused by the federal government rather than fiscal policy itself," he concluded.