MNI INTERVIEW: Banxico May Pause Rate Cuts After June - Armijo

The Central Bank of Mexico is likely to take advantage of a window of opportunity to ease further as the U.S. focuses its tariff offensive on China, cutting its interest rate twice more by 50 basis points to 8.00% by June, former senior Banxico economist Alberto Armijo told MNI.

But the board could consider a pause at its August meeting as the rate differential with the U.S. approaches the historical average of 500 basis points, Armijo, now head of economic analysis at a large pension fund, said in an interview.

“The materialization of the economic slowdown, along with a decline in inflation, particularly in services, which had shown some persistence, justifies the rate cuts,” he said, noting that the minutes from the last meeting, published last Thursday, were consistent with the dovish tone of the statement.

Banxico cut its interest rate by 50 basis points to 9.00% last month and signaled it would deliver at least one more cut of the same magnitude at its next meeting in May.

CONSISTENT TONE

“The board has communicated the next rate cut very clearly. As a result, the odds are tilted toward continued cuts going forward, though not at every meeting. I believe that as the rate differential drops below the historical average, a reassessment of the calibration will be necessary, and a pause could be considered after the June decision,” Armijo said.

While U.S. trade policy is a source of elevated uncertainty, Mexico has benefited as President Donald Trump turns his attention to China, the former Banxico economist said.

TARIFFS FOCUSED ON CHINA

“Trump is focusing on China and has decided to make concessions to other countries. In this context of uncertainty, the shock seems to be more directed toward a slowdown that reduces prices, which still keeps the window open for these rate cuts,” he said.

But Banxico could act more cautiously if there were disorderly exchange rate moves or if Mexico retaliated against U.S. tariffs, adding to inflationary forces, Armijo adde.

“It seems to me that the government of Mexico has acted cautiously, and that has been the best response given the volatility of U.S. trade policy,” he said.

“In the Banxico minutes, most members outlined a scenario involving trade tariffs, but it seems that Mexico does not respond,” he noted. (See MNI INTERVIEW: Banxico Limited In Ability To Respond To Trump)