MNI INTERVIEW: Banxico To Cut Despite Inflation Risks - Zaga

The Central Bank of Mexico is likely to deliver another 25 basis point interest rate cut next week and then pause at 6.50% for a while, even though rising inflation pressures suggest easing is not warranted, former Economy Ministry deputy general director Daniel Zaga told MNI.

"I think they will cut 25bps again at the next meeting and then hold the rate at 6.50% for some time," Zaga, now chief economist for Spanish-speaking Latin America at Deloitte, said in an interview.

"Considering that inflation is rising rapidly and that there are several factors creating a clear upside bias -- the conflict in Iran, a sustained increase in core inflation following minimum wage hikes, and the World Cup, which will generate localized pressures --, I do not believe it is appropriate to lower interest rates in this environment," he added.

Banxico cut its interest rate by 25 basis points to 6.75% last month, with Deputy Governors Jonathan Heath and Galia Borja dissenting in favor of holding borrowing costs unchanged. The board said it "will evaluate the appropriateness and timing for an additional reference rate cut."

Zaga expects upcoming meetings to remain split, especially the next one. (See MNI INTERVIEW: Banxico Majority Wants One More Cut Soon- Heath)

CORE INFLATION UNDER PRESSURE

He noted that core inflation has shown a clear upward trend for some time, pushing it above the upper bound of Banxico’s 3% target, which allows a 1 percentage point deviation in either direction. 

"Adding to this the short-term factors stemming from geopolitical conflicts, both tariffs and the conflict in Iran, as well as certain mid-year pressures, we can conclude there is a clear upside bias to inflation and that inflation expectations could begin to de-anchor," he stressed.

Regarding the Mexican peso, which has performed well despite external uncertainties, he noted the real interest rate has not been that low, which continues to support the currency.

"From a longer-term perspective, the peso’s strength may also reflect some confidence in the Mexican economy, pending a resolution of the USMCA, even if not by July 1."

Mexico, the United States and Canada will soon begin negotiations to revise the United States-Mexico-Canada Agreement (USMCA), with an officially mandated review scheduled for July 1.

He believes the key point is that an agreement is very likely, though not necessarily by July 1. "The main implication is that, following an agreement, we would likely see an increase in investment, which fell 7% in 2025, boosting economic growth," he said.

Zaga also said the war in Iran is undoubtedly inflationary, especially if the conflict persists, as the Mexican government has limited fiscal room to sustain indefinite fuel tax support.