MNI INTERVIEW: Banxico Should Pause, But Probably Won't-Kaiser

The Central Bank of Mexico should pause its rate-cutting cycle to reaffirm its independence and its commitment to reducing inflation, but it is more likely to keep cutting for now, former Banxico director and advisor Federico Rubli Kaiser told MNI.

Kaiser said the next decision is likely to be split and the board could opt for a 25 basis-point cut if the more hawkish majority prevails, or 50 basis points if dovish members win out, using weakness in economic activity as the main justification.

Banxico's forecast for economic growth is just 0.1% for 2025.

"The continued strength of the exchange rate might be used as a pretext by the board to keep cutting. But I don’t think the board should rely on exchange rate movements to guide its decisions, since appreciation can be quickly reversed at any time," Kaiser, now an associate advisor at MAAT Consulting, said in an interview.

He considered that Banxico’s latest decision to reduce its policy rate by 50 basis points to 8.50% last month was appropriate, but not its signal of at least one more cut in June, potentially of the same size.

"I would have preferred a statement that was far less dovish and much more cautious going forward, especially in light of the recent uptick in inflation. Core inflation, in particular, continues to run above 4% annually, which suggests the easing cycle should pause for one or two meetings," Kaiser said.

"Further rate cuts would not be consistent with a scenario in which core inflation is not coming down," he added.

UNDER PRESSURE

The former Banxico director said that the board is under pressure from the government to continue cutting rates in order to help ease the cost of public debt. (See MNI EM INTERVIEW: Banxico To Cut 50BP If Inflation Allows -Guzman)

"The board has faced direct pressure from President Sheinbaum, who recently said at the National Banking Convention that the central bank should do more to lower rates in the financial system," he noted.

But core inflation is still too high, Kaiser stressed.

"While Banxico says the policy rate should remain in restrictive territory, its actions and the intentions reflected in its forward guidance are not entirely aligned with that. Banxico should reinforce both its actions and its communication to reach the 3% target more quickly, not as slowly as it's currently projecting, which is by the end of 2026,” he said.

"In any case, the decision is likely to be split. In my view, the best way to reinforce the central bank’s independence in the face of government pressure — and to reaffirm its commitment to controlling inflation — would be to pause for two consecutive meetings. But I see that as unlikely.”

TRUMP'S EFFECTS

U.S. President Donald Trump's trade policy affects monetary policy through the exchange rate, which in turn impacts inflation, he noted. "However, I think that right now, with recession risks increasing, the downward pressure on activity would more than offset the inflationary impact of the tariffs in the overall risk balance."

While some analysts say Mexico came out ahead in the tariff negotiations, Kaiser warns it’s too early to make that judgment, given Trump’s unpredictability.

"I think President Sheinbaum’s cautious and passive approach to dealing with Trump may have been a valid strategy early in his term. But over time, that strategy has worn thin and become largely ineffective."