MNI INTERVIEW: Dovish Banxico More Data-Dependent-Ex-Economist

Mexico's central bank is becoming more data dependent after a dovish tilt in its latest policy statement opened the door to interest rate cuts, putting even more weight than usual on upcoming inflation figures, former senior economist at Banxico Alberto Armijo told MNI.

"While the dovish bias in the statement is more noticeable, leaving the door open for cuts soon, there are still some elements that could be considered to postpone the cut in March," Armijo said in an interview.

Banxico kept its overnight interbank interest rate at 11.25% Thursday, but the board dropped the commitment to keeping policy steady for "some time" and said it will assess the possibility of reducing borrowing costs in coming meetings. (See MNI INTERVIEW: Banxico Cuts Coming Even If Premature-Ex-Deputy)

Armijo said the forward guidance is a nod to a data-dependent stance in the assessment of when to deliver cuts, adding that a recent inflation uptick affected year-end inflation expectations and raised inflation forecasts.

"Although central banks don't actively react to supply shocks, if the uptick continues in the general or the persistence in the core component, Banxico might need to keep the rate unchanged to meet convergence by 2Q25," he reminded.

Indeed, Banxico stated "it will take into account the progress in the inflation outlook and the challenges that prevail."

INFLATIONARY PRESSURE

Banxico's reference to remaining "challenges" in the inflation outlook is effectively a warning about high levels of uncertainty surrounding officials' inflation forecasts -- including lingering upside risks.

"Despite a slowdown in economic activity, the output gap remains positive, which is a pressure point for Banxico to postpone cuts," added Armijo.

Regardless of when it chooses to cut rates, Banxico was right to gradually guide markets toward the notion of an eventual monetary easing, he said. (See MNI INTERVIEW: Banxico Should Be Cautious On Rate Cuts-Guzman)

"A member indicated in the minutes of the December decision that nominal rate cuts would be 'fine-tuning,' probably referring to maintaining the level of restraint while taking advantage of a continuous reduction in expectations," Armijo said.

"We will have to pay attention to that detail in the minutes. As long as inflation expectations do not show a significant rebound, the space for a reduction in the nominal rate could continue to open up."