MNI POLICY: Banxico Leans Toward Cut As Core Inflation Falls

MNI (BRASILIA) - Recent positive trends in Mexican core inflation have increased the likelihood that the central bank will cut its benchmark interest rate by 25 basis points to 10.75% at its meeting on Aug 8, though peso weakness and other risks mean any decision to ease could come via another split decision, MNI understands.

While Banxico held its overnight interbank interest rate at 11% for a second consecutive meeting in June, the Board's statement suggested that the inflationary environment might justify discussions on rate cuts in future meetings. Minutes from the meeting released later showed that Deputy Governor Omar Mejia, who dissented in favour of a 25-basis-point cut, argued that policymakers should not place excessive weight on accelerating non-core prices as they pursue their 3% inflation target.

Annual INPC inflation jumped to 4.98% in June from 4.69% in May, a fourth consecutive increase following a steady decline from a peak of 8.70% in 2022 to a low of 4.40% in February, according to the Mexican National Institute of Statistics and Geography. But the core measure fell to 4.13% in June from 4.21% the previous month, the lowest since April 2021 and continuing the downward trend seen since the start of 2023.

PESO WEAKNESS

However, while the core trend is increasingly likely to sway the Board, members remain concerned about risks such as those stemming from U.S. monetary policy and upcoming presidential elections, as well as peso weakness, meaning that any decision to ease is likely to be the result of another split decision, MNI understands. (See MNI INTERVIEW: Banxico Set To Cut Rates, Likely Split - Guzman)

The central bank is also closely looking at domestic uncertainties regarding the economic policies of the next government, to be led by President-elect Claudia Sheinbaum. These uncertainties make a sustained easing cycle less likely and leave room only for minor rate adjustments in what remains of 2024. (See MNI INTERVIEW: Banxico Likely To Cut Twice In 2024-Covarrubias)

The peso has come under pressure since Sheinbaum’s victory on June 2, depreciating from MXN16.98 to the dollar on election day to around MXN19 after starting the year at around MXN 16.