MNI WATCH: Banxico Signals More 50BP Cuts At Coming Meetings
MNI (BRASILIA) - The Central Bank of Mexico's signal that it will deliver additional half point interest rate cuts at upcoming meetings marks a further dovish turn for policymakers that coincides with receding inflation and heightened policy uncertainty in the face of a looming tariff threat from the United States.
The decision to lower benchmark borrowing costs by 50 basis points to 9.50% Thursday was accompanied by language indicating further policy adjustments of "similar magnitudes," pointing to a faster pace of reductions not just at the next meeting but at least one more after that.
"The Board estimates that, looking ahead, it could continue calibrating the monetary policy stance and consider adjusting it in similar magnitudes," the statement said. (See MNI INTERVIEW: Banxico Set For Larger Cut That Poses Risks)
Deputy Governor Jonathan Heath dissented in favor of a smaller 25bp cut, though the 4-1 vote suggests enough momentum to forge ahead. This was the first meeting of new member José Gabriel Cuadra García, recently appointed as Deputy Governor to replace Irene Espinosa, who completed her term at the end of last year. He has been working as a Banxico official for 20 years in key positions, including researcher and analyst.
DOVISH BOARD
In his debut, he voted with the majority for the deeper cut, which might confirm the market's thesis that the board would become more dovish with Espinosa's departure.
In the last four decisions, Banxico had maintained a 25bp rate cut pace but signaled in December that future moves could potentially include larger adjustments. (See MNI WATCH: Banxico Set To Accelerate Pace By Cutting 50BP)
The acceleration in the easing cycle comes after U.S. President Donald Trump imposed a 25% trade tariff on Mexico and Canada, along with an additional 10% on goods and services from China, though he agreed to put the new levies for Mexico and Canada on hold for a month after negotiations.
The pause provided some relief, but uncertainty remains regarding further tariff measures, impacting the Mexican peso’s performance amid fears of a full-blown trade war and its potential impacts on monetary policy.
HIGH UNCERTAINTY
The board mentioned U.S. tariffs, noting "an environment of high uncertainty" because of the threat.
"The United States announced the imposition of tariffs on its imports from China, Mexico and Canada, but agreed to pause the implementation of those from the latter two countries," the statement said. "After the announcement on the imposition of tariffs, it (the peso) showed a significant depreciation that reverted once the agreement to pause the tariffs was negotiated."
Banxico also pointed out that the weakness of the Mexican economy intensified in the fourth quarter of 2024, as it registered a contraction. "As for the labor market, employment has slowed down. The balance of risks to growth of economic activity is biased to the downside."
INFLATION DOWN
As another justification for the deeper rate cut, the board stated that headline inflation had decreased to 3.69% in the first half of January, its lowest level since the beginning of 2021.
"Core inflation reached 3.72% during the same period, close to its average level between 2003 -- when the 3% permanent target was set -- and 2019. Inflation expectations for the medium and longer terms remained relatively stable at levels above target," it said.
Banxico still expects headline inflation to converge to the 3% target by the third quarter of 2026, but the balance of risks remains tilted to the upside. "Nevertheless, the inflationary episode stemming from the effects of the pandemic and the onset of the war in Ukraine is being resolved."