MNI POLICY: Even Banxico Hawks Accept Inflation Projections

MNI (BRASILIA) - Recent dissenting votes within the Central Bank of Mexico board have been driven by disagreements over risks to inflation, but there was still consensus at September’s meeting over Banxico’s own central projections, despite these being more optimistic than those of the market, MNI understands.

Last month, Banxico cut its policy rate by 25 basis points to 10.50%, with Deputy Governor Jonathan Heath, who favored a hold, the sole dissenter. Heath's reasons for diverging will be known in the minutes to be released this Thursday, but they are based on his perception of upside risks to prices rather than on any disagreement over Banxico’s September projections, which were revised slightly downwards.

These foresee headline inflation of 4.3% this year and reaching the 3.0% target by the end of 2025, while core inflation is expected to be 3.8% for 2024 and 3.0% by 2025. In contrast, Banxico’s latest survey of private-sector experts, released on Oct 2, put headline inflation this year at 4.44% and at 3.80% in 2025. The median forecasts for core inflation were 3.83% and 3.70%, respectively.

AUGUST MEETING

Heath also dissented against August’s 25bp cut, when he was accompanied in calling for a hold by Irene Espinosa. The meeting’s minutes showed that Heath argued that a cut could be perceived as premature and might undermine the central bank's credibility.

Some members then also noted that headline price expectations remain above Banxico's forecasts, commenting that no analysts anticipated inflation of close to 3% by the end of 2025. Even so, all members agreed with the inhouse projections for both the headline and core measures to converge to 3% by the fourth quarter of 2025.

August’s minutes showed that the board still considered inflation risks to be tilted to the upside, though more dovish members argued that the positive trajectory of core inflation and the weakness in economic activity would allow for monetary policy easing.

Upside risks stemmed from the persistence of core inflation, foreign exchange depreciation, increased cost-related pressures, climate-related impacts, and intensifying geopolitical conflict. (See MNI INTERVIEW: Banxico To Continue Easing Through 2025 - Tapia)

 At its June meeting, Banxico maintained its interest rate at 11%, with Deputy Governor Omar Mejia dissenting in favor of a cut.