MNI INTERVIEW: Banxico Not Tied To Multiple 50BP Cuts-Borja

The Central Bank of Mexico is not necessarily heading for multiple repeats of this month’s 50-basis-point rate cut as it weighs both upside and downside price risks from potential U.S. tariffs and seeks the necessary level of restriction required to bring inflation to target in a slowing economy, Deputy Governor Galia Borja told MNI.

"We have been clear that we are in a process of calibration. The 50bp cut was a decision we took, but this does not necessarily mean there will be multiple moves of the same magnitude. Each decision will depend on inflation data and our risk balance, among other considerations," Borja said in an interview at her offices in Mexico City.

Banxico accelerated the pace of interest rate cuts at its February meeting, reducing its overnight interbank benchmark by 50 basis points to 9.50%, and signaled similar cuts at upcoming meetings, with Deputy Governor Jonathan Heath dissenting in favor of a smaller 25bp move.

"There is no predetermined level we aim to reach with the policy rate. Decisions will be made on a meeting-by-meeting basis, based on inflation data, inflation expectations, and other key inflation determinants such as economic activity,” said Borja, adding that with regards to the level of restriction required to bring inflation to the target, "this is precisely the discussion we have at each meeting." 

ACTIVITY AND INFLATION

A weaker economy is as an early signal of reduced inflationary pressures ahead, she said. (See MNI INTERVIEW2 -Banxico Optimistic On Non-Core Inflation-Heath)

"A slowdown in Mexico's economic activity suggests that, going forward, there will be lower demand from all economic agents in the country, easing price pressures and supporting further disinflation," Borja said.

"Our mandate does not include economic activity. Our constitutional mandate at the Bank of Mexico is to maintain low and stable inflation. However, economic activity is important in achieving this goal because it helps anticipate macroeconomic conditions that influence the inflation outlook.”

Commenting on the split in Banxico’s last vote, with Heath dissenting from a 50bp cut, she noted that "recent discussions on potential changes to U.S. trade policy have introduced a degree of uncertainty in both international and local markets," adding that she speaks from her own perspective, not for her colleagues.

"Diversity and plurality of perspectives are welcome. They enrich the discussion and improve the assessment of the best possible decision.”

TRUMP TARIFFS

Mexico is awaiting results of a month of negotiations to see whether U.S. President Donald Trump goes ahead with threats for a 25% tariff on goods exports. The U.S. has also slapped 25% tariffs on steel and aluminum imports, likely starting in early April, and said it will impose a new regime of reciprocal tariffs. (See MNI INTERVIEW: Trump Means Banxico Must Be Cautious -Heath)

"Looking ahead, different scenarios can be considered, but there is no certainty about what changes will ultimately take place," Borja said, noting that the scope and duration of the impact of any moves will be key for Banxico.

While trade restrictions could slow activity by reducing exports, Mexico’s flexible exchange rate acts as a buffer which absorbs external shocks but could lead to a depreciation with potentially inflationary effects, she said.

"For the next meeting, our decision will depend on observed inflation data, inflation expectations, and other relevant factors," she said, when asked whether the imposition of tariffs out could alter the plan for a 50bp cut at the next meeting.

"Mexico has maintained strong macroeconomic fundamentals, which have helped us navigate volatility. As a small and open economy, Mexico is exposed to external shocks, which is why the exchange rate plays a key role," she added.