MNI WATCH: Banxico Signals Larger Cuts Next Year
MNI (BRASILIA) - The Central Bank of Mexico's unanimous interest rate cut Thursday was accompanied by a decidedly dovish policy statement that strongly hinted not only at additional reductions ahead but also an acceleration of the pace of easing early next year.
The new guidance might lead the market to start pricing in a 50-basis-point pace of cuts at upcoming meetings. (See MNI INTERVIEW: Banxico To Cut 25BP Despite Inflation Risks)
"Looking ahead, the Board expects that the inflationary environment will allow further reference rate reductions. In view of the progress on disinflation, larger downward adjustments could be considered in some meetings, albeit maintaining a restrictive stance," said the statement.
The board continues to argue that the benign path of core inflation allows the easing process. "Core inflation, which better reflects inflation’s trend, continued its clear downward trend, going from 3.80 to 3.58% in the same period (October to November)," the document stressed.
EXPECTATIONS DECLINING
It was the fourth consecutive quarter point rate cut, and it brought the benchmark rate to 10.0%. The monetary authority highlighted that inflation expectations for the end of 2024 were revised downward, while those for 2025 remained relatively stable at levels above the target.
The document also noted that merchandise inflation is low, while services inflation has declined moderately.
In contrast, Banxico now expects headline inflation to converge to the 3% target by the third quarter of 2026, compared to the fourth quarter of 2025 in its previous forecast.
NEUTRAL EFFECTS
Regarding U.S. president-elect Donald Trump’s promise to implement tariffs on goods from Mexico and Canada, the central bank said the prospect of new tariffs adds uncertainty to the forecasts but has a neutral impact on the balance of risks, because it could have both upward and downward effects on inflation.
"Among key global risks are the possibility of policies that revert global economic integration, the intensification of geopolitical turmoil, the protraction of inflationary pressures, and higher levels of volatility in financial markets," it said.
The board pointed out that the Federal Reserve quarter point rate cut this week strengthened the dollar. (See MNI INTERVIEW: Moody's Monitors Mexico Fiscal Efforts, Peso)