MNI WATCH: Banxico Hints At More Rate Cuts After Split Vote

MNI (BRASILIA) - Mexico's central bank signaled the possibility of another rate cut in September after reducing its overnight interbank interest rate by 25 basis points to 10.75% Thursday, saying in its policy statement that the current inflationary environment might allow for additional easing moves in the future.

Thursday's decision was split, with governor Victoria Rodríguez and deputy governors Galia Borja and Omar Mejia in favor of the rate cut, and deputy governors Irene Espinosa and Jonathan Heath voting to hold borrowing costs at 11%. 

The main argument for the cut was the continued decline in core inflation, despite a resurgence in headline inflation, which has risen for five consecutive months. The board also emphasized the balance of risks to economic growth remains to the downside amid a restrictive monetary policy stance.

"Annual headline inflation rose to 5.57% in July, driven by a significant increase in the more volatile non-core component. Core inflation, which better reflects the underlying trend, has decreased for 18 consecutive months, registering 4.05%," the statement highlighted.

Banxico's forecast for annualized seasonally adjusted core inflation is 3.7% for the third quarter, with headline inflation still expected to converge to target by the end of 2025. However, "the balance of risks for the trajectory of inflation within the forecast horizon remains biased to the upside," the policy statement said. 

The central bank pointed out the need to maintain a restrictive monetary policy to achieve its 3% inflation target. 

SPLIT DECISION

In June, after holding the rate at 11% for the second consecutive meeting, the board said inflationary trends might justify discussions of rate cuts, and the language was repeated Thursday. 

"Looking ahead, the Board foresees that the inflationary environment may allow for discussing reference rate adjustments," its statement said.

Mejia, who advocated for a 25-basis-point cut, said that policymakers should not overemphasize rising non-core prices, according to the minutes of the June meeting. 

As MNI reported, Mejia's argument had gained traction within the board. However, concerns over peso weakness and other risks suggested that any decision to ease would likely result in another split decision. These concerns have only intensified following recent fluctuations in the exchange rate. The peso weakened to a low of 20 to the dollar on Monday amid rising fears of a U.S. recession and a sharp unwinding of yen-funded carry trades that hit emerging-market currencies before recovering to below MXN 19. (See MNI POLICY: Banxico Leans Toward Cut As Core Inflation Falls)

In interviews with MNI in July, former Banxico Deputy Governor Javier Guzman indicated that the central bank had clearly signaled a 25-basis-point cut in August, though he anticipated that two of the five board members would vote to hold. Former Deputy Manager of Research Strategy Enrique Covarrubias also predicted two more cuts this year, noting an increased likelihood of split votes at upcoming meetings. (See MNI INTERVIEW: Banxico Set To Cut Rates, Likely Split - Guzman and MNI INTERVIEW: Banxico Likely To Cut Twice In 2024-Covarrubias)

The reasoning behind Espinosa and Heath's dissents will be detailed in the meeting minutes, set to be released Aug. 22.