MNI INTERVIEW: Banxico Likely To Cut 50BP, Chance Of Dissent

The Bank of Mexico is likely to reduce its interest rate by another 50 basis points to 8.00% at the next meeting, with a chance of a dissenting vote in favor of a smaller cut, the former deputy general director at Mexico’s Ministry of Economy Daniel Zaga told MNI.

"I believe the board will cut rates by another 50 basis points at the next meeting, although future meetings may bring smaller cuts, fully dependent on the latest inflation data," Zaga, who left government service in 2018 and is now chief economist for Spanish-speaking Latin America at Deloitte, said in an interview.

He noted that inflation has risen in recent readings and has now exceeded the upper limit of the central bank’s 3% target range, which allows a maximum of 4%.

"The main driver has been non-core inflation, especially agricultural products, which are highly volatile. However, core inflation has also been increasing, particularly in goods, though at a slower pace," the former official said.

CONTINUE EASING

Banxico is expected to continue easing policy to a range between 7.5% and 7%, he said.

"With the economy experiencing a significant slowdown and the Mexican peso appreciating, it’s not surprising to say it was indeed the right decision to cut 50 basis points at the last meeting. That said, given the recent uptick in inflation, the outlook may change," he noted.

"We believe there could be a vote in favor of a smaller cut at the next meeting. I don’t think there will be any votes for a pause," he added. (See MNI INTERVIEW: Banxico Should Pause, But Probably Won't-Kaiser)

Last month, Banxico reduced its interest rate by 50 basis points to 8.50% and signaled at least one more cut in June, potentially of the same size.

Zaga said it is important to continue lowering interest rates gradually, even if they remain in contractionary territory for some additional time. "Furthermore, to keep bringing inflation down, it is important for the country to promote more competition, reduce tariffs in selected sectors, and improve security, since insecurity increases business costs."

U.S. TARIFFS

The tariff changes imposed by the U.S. government are causing disruptions to both global and regional supply chains, which could affect business costs and, in turn, inflation, Zaga said.

"However, the United States has been negotiating with several countries and has started to reduce tariffs, so I wouldn’t expect a major impact on Mexico in terms of inflation.”

But, he noted, the tariff tensions have directly affected economic activity, both in the U.S. and in Mexico. (See MNI EM INTERVIEW: Banxico To Cut 50BP If Inflation Allows -Guzman)

"And this downside impact on activity should not only be expected through exports but also through investment. Greater risk aversion delays several investments that could otherwise arrive in the country in the short term."

Even though negotiations between the United States and Mexico pose a commercial challenge for both economies, he said that the sources of uncertainty may start to ease, allowing Mexico to return to a path of stronger and more sustained growth.