MNI INTERVIEW: Banxico To Cut 50BP If Inflation Allows -Guzman

The Central Bank of Mexico intends to cut its interest rate by 50 basis points to 8.00% in June, though this will depend on inflation developments as its forward guidance does not represent a firm commitment, former Banxico Deputy Governor Javier Guzman told MNI.

"The message they’re sending is that they intend to cut by the same magnitude, by 50 basis points. In terms of their current intention, there’s no doubt," Guzman said in an interview.

"The big question is whether inflation behavior between now and the next meeting will allow them to do so. They’re signaling that this is what they would like to do, but obviously, if inflation evolves unfavorably, it may force them not to stick to that current communication. It’s a risk they’re willing to take because, in the end, there’s no formal commitment.”

Banxico reduced its interest rate by 50 basis points this month to 8.50% and indicated at least one more cut in June, potentially of the same size. (See MNI WATCH: Banxico Keeps Dovish Stance, Reaffirms Restrictive)

RIGHT DECISION

For the former deputy governor, the decision was in the right direction. "Clearly, the economy is very weak. You saw today the sharp downward revision to the growth forecasts by the Bank of Mexico, and I believe there will be further downward adjustments to that projection. My impression is that this year, what we’ll see in Mexico is a recession — a contraction of the economy."

While Banxico does not have an economic contraction as its central scenario, it emphasized that risks are clearly tilted to the downside, Guzman said. 

"In my view, there’s actually a very high probability that the 0.1% growth figure will turn negative, which still falls within the Bank of Mexico’s forecast range.”

With such a weak economy, there are no demand-side pressures on prices, though he noted that growth in wage costs is well above that of productivity.

"So you have an economy that is not very productive, with rising wage costs, and I believe that’s putting upward pressure on inflation," he said. 

U.S. TRADE POLICY

The effect of U.S. tariffs on Mexico is uncertain, and could be either inflationary and disinflationary.

"On one hand, it slows down the economy, which reduces price pressures. On the other hand, it can put pressure on the exchange rate and affect the supply of goods in Mexico," he said, adding that the peso has behaved well so far but there's no guarantee this will continue given the unpredictability of current U.S. decision-making.

The stance taken by the Mexican government in negotiating with President Donald Trump was "the most reasonable one,” he said.

"The problem is that you're negotiating with a country that has a much larger economy than yours, and it’s also your main trading partner. Entering into a confrontational situation is very risky. So I believe this approach was the best."

Still, there are different possible approaches, and Guzman noted that Canada has adopted a more confrontational stance toward the United States to achieve a very similar result.

"Even though I believe the Mexican government took the right position, I don't think it was a decisive factor in the outcome, since ultimately different positions led to more or less the same solution."