MNI BANXICO WATCH: Another 25BP Cut To 7% Likely, Split Again

The Central Bank of Mexico is widely expected to cut its overnight interbank rate by 25 basis points to 7.00% at its final meeting of the year, the lowest level since May 2022. It would be the fourth reduction in a row of this size, following four 50-basis-point reductions in the first half of the year.

Banxico cut rates by 25bp to 7.25% in a split decision last month, with Deputy Governor Jonathan Heath dissenting in favor of a hold. Expectations point to an even more divided board at this week's meeting, especially after the latest inflation data came in worse than expected.

HAWKISH COMMENTS

Deputy Governor Galia Borja recently made hawkish comments highlighting the resilience of core inflation and additional risks for next year from higher taxes and uncertainty over tariffs imposed by the United States. She said there could be a reversal in the downward trend of headline inflation.

Mexico’s November inflation was 3.80%, above the 3.69% consensus forecast and up from 3.57% in October. Core inflation rose to 4.43% from 4.28% in the previous month. Despite the deterioration, headline inflation remains within the central bank’s 3% target range, which allows for a one-percentage-point variation in each direction.

Banxico’s aggressive rate cuts this year were driven by progress in bringing inflation closer to the 3% target. (See MNI POLICY: Banxico Split on FX Effects As US Spread Narrows) Banxico started the easing cycle in March 2024 with a 25bp cut and, after two meetings holding rates steady, has cut rates at every occasion since August 2024.

NEUTRAL RATE

After the latest Banxico reduction, the ex-ante real rate stood at 3.36%, entering the board’s estimated neutral rate range of 1.8% to 3.6%, with a midpoint of 2.7%.

Deputy governor Omar Mejia told MNI in an interview that the neutral rate is an unobservable variable and must be interpreted in light of prevailing macroeconomic conditions, not solely based on whether the policy rate crosses that threshold. (See MNI INTERVIEW: Rate Lags On Credit Back Gradual Easing - Mejia)

After co-authoring a paper on the subject, he said Mexican credit markets react with a delay to interest rate moves, and the effects of past monetary tightening will continue to filter through, allowing policymakers to keep adjusting policy gradually.

Former Economy Ministry deputy general director Daniel Zaga told MNI in an interview that Banxico is likely near the end of its easing cycle after a 25-basis-point rate cut last week to 7.25%, as core inflation remains elevated. (See MNI INTERVIEW: Banxico Nearing End Of Easing Cycle - Zaga)