MNI POLICY: Banxico Set To Discuss Forward Guidance

Mexico's central bank is set to discuss not only whether to initiate an interest rate-cutting cycle in its next meeting on March 21 as a first reduction is widely expected, but also how to communicate further steps, MNI understands.

Formulating a solid forward guidance in a divided board could prove challenging. However, there appears to be a consensus that monetary policy should be data-dependent and remain restrictive, at least in the long-term, given persisting high uncertainty. (See MNI INTERVIEW: Dovish Banxico More Data-Dependent-Ex-Economist)

The central bank is focused on delivering forward guidance that anchors expectations in the right direction while preserving room for maneuver in monetary policy.

Following a three-month upward trend, Mexican inflation decelerated in February, dropping from 4.88% in January to 4.40%, after a peak of 8.7% in August 2022. The data, released on Thursday, has increased expectations of a 25-basis-point rate cut this month.

But during a virtual presentation of the central bank's quarterly economic update for Q4 2023 last week, some board members showed heightened concern about a potential resurgence of inflation. Deputies Jonathan Heath, formerly viewed as dovish, and Irene Espinosa spoke about risks and emphasized the importance of basing decisions on available data. (See MNI INTERVIEW: Banxico Should Be Cautious On Rate Cuts-Guzman)

HEATH SEEN AS DOVE UNTIL NOW

"I believe it would be a huge mistake to start easing the policy rate prematurely, long before it's clear whether we can truly win the battle in the time we are assigning," warned Heath. He highlighted the risk of declaring victory and cutting interest rates early based on the past. "It is very important that we do not make this mistake."

Heath added that any reduction in borrowing costs, "in March or May", should exclusively be related to adjusting the real level of rates. Banxico expects to achieve the 3% target in the second quarter of 2025. (See MNI INTERVIEW: Banxico Minutes Reinforce March Rate Cut-Roldan)

Deputy Omar Mejia and governor Victoria Rodriguez, on the other hand, emphasized significant disinflation over the past year, asserting that the real rate of interest is elevated and requires adjustment. Deputy governor Galia Borja talked about improvements to the inflation outlook but stressed the need for prudence and caution. All participants reinforced the relevance of maintaining a restrictive monetary policy.

Banxico kept its overnight interbank interest rate at 11.25% in February, 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.