MNI INTERVIEW: Banxico To Cut Once More And Hold - Covarrubias

The Central Bank of Mexico is likely to reduce its policy rate by 25 basis points to 7.50% at its next meeting in September before pausing its easing cycle until next year, former Banxico deputy manager of research strategy Enrique Covarrubias told MNI.

Minutes released Thursday confirmed a shift to a pause, he said.

"I think these minutes in particular were very relevant, because they were one of the first stages of this process of ending the monetary policy easing cycle. And it seems to me that there is indeed a change of tone in this regard," Covarrubias, now chief economist at Actinver, said in an interview.

The rate-cutting cycle has been mainly driven by domestic factors, he said.

"It has been due both to the economic slowdown and also to the decline in the inflation rate, especially compared with a year ago. And these rate cuts at some point have to end, at least for these domestic reasons,” he said.

"And it seems to me that the signal the Governing Board as a whole is giving is that, in general, yes, we should be expecting the next meeting to be the last of the rate cuts. But at the same time, they do not want to completely close the door to additional cuts.”

EXTERNAL FACTORS

External factors could give Banxico more room to continue the easing cycle next year, he said. (See MNI EM INTERVIEW: Banxico Mulling More Gradual Policy - Mejia) 

"There is uncertainty on several issues related to what the Federal Reserve in the United States will do, for example, and about inflation behavior due to U.S. tariffs."

The former Banxico economist forecasts interest rates to end this year at 7.50% and 2026 at 6.5%, while inflation might be above 4% this year.

"This is an inflation that is clearly above the Bank of Mexico’s mandate, and I think that is why at this moment there is some nervousness among members of the Governing Board, even someone who has already voted not to move the rate," he noted.

Banxico slowed the pace of its easing this month, reducing its overnight interbank rate 25 basis points to 7.75% and signaling more cuts ahead without specifying the size. Deputy Governor Jonathan Heath dissented in favor of holding.

DISSENTING VOTES 

Covarrubias said that upcoming decisions are likely to continue with dissenting votes not only at the next meeting, with one vote to hold, but even during a possible pause, with at least one member voting to continue cutting.

The effects of the trade tariff policy of Donald Trump’s U.S. administration are still uncertain, but Mexican exports have remained strong even several months after the announcement, he said.

The recent solid performance of the peso’s exchange rate is due to many factors, he said, though he added that it was probably due more to worsening sentiment toward the dollar than to unambiguous confidence in Mexico’s currency.