MNI INTERVIEW: Banxico Nearing End Of Easing Cycle - Zaga

The Central Bank of Mexico 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 at high levels, former Economy Ministry deputy general director Daniel Zaga told MNI.

"I think the latest 25-basis-point cut is fine, but it should already be reaching the limit of reductions the central bank can deliver," Zaga, who left government service in 2018 and is now chief economist for Spanish-speaking Latin America at Deloitte, said in an interview.

While headline inflation is below 4% and within Banxico’s target range of 1 percentage point above or below 3%, core inflation remains resilient, he said.

"Non-core inflation, which is very volatile, is currently very low. That means it could rise at any moment because it depends more on factors not related to monetary policy," he said, nothing inflation pressures particularly from increases in the minimum wage over the past seven years.

EASING CYCLE NEARS END

In his view, the central bank might deliver one or two more 25-basis-point cuts, including one in December. (See MNI BANXICO WATCH: One More Cut Signaled, Pause Could Be Near)

"Today we’re at 7.25%. We might see one or two more cuts. I really don’t think there will be any beyond that," he said.

Banxico cut its policy rate by 25 basis points to 7.25% last week, with Deputy Governor Jonathan Heath again dissenting in favor of holding. The board signaled at least one more reduction ahead.

Zaga believes the next few decisions will be increasingly split as the bank approaches the end of the easing cycle.

"I think there are, in some way, certain pressures for the central bank to cut rates, and the main one is that the federal government is increasing spending significantly, especially expected for next year."

TIED TO FED MOVES

Banxico’s next moves will also be strongly influenced by the Federal Reserve, he said.

"The rate differential between Banxico and the Fed is very low, just a little over 300 basis points. Historically, it has reached 500 or 600 basis points. If the Fed cuts, we have room to cut without causing the currency to depreciate. But if the Fed doesn’t cut, I think we shouldn’t move at all," he noted.

Zaga also emphasized that the neutral interest rate may be higher than the central bank’s current estimate, which is a range between 1.8% and 3.6% in real terms, with a midpoint of 2.7%.