MNI INTERVIEW: Banxico To Keep To 25BP, Caution Needed -Guzman

The Central Bank of Mexico is likely to stick to 25-basis-point rate cuts in upcoming meetings, as signaled in its official communication, but the board should proceed cautiously, conditioning forward guidance to a more data-dependent approach to avoid unsettling inflation expectations, former Banxico deputy governor Javier Guzman told MNI.

"I believe that in the future it would be worth considering adjusting the forward guidance to send a more cautious message, conditioning decisions on the available data. I agree with most analysts that if circumstances allow, which is still unclear, rate adjustments would continue at 25 basis points per meeting," Guzman said in an interview.

Banxico cut rates by 25 basis points to 7.50% last week, with Deputy Governor Jonathan Heath dissenting for a third time, voting to hold at 7.75%. The board said it will continue evaluating “further adjustments” at upcoming meetings.

The former official stressed that although headline inflation and expectations remain above target, with core inflation particularly high, the board appears to be taking advantage of the room created by lower U.S. interest rates, weak economic activity in Mexico, and the peso’s appreciation to reduce the policy rate.

"On the other hand, because inflation and inflation expectations are above target, Banxico must proceed with great caution. The message conveyed in the statement is that they intend to continue cutting rates for the remainder of the year. However, there is a risk this will be interpreted as a virtually predetermined decision, which could affect inflation expectations," he added.

TERMINAL RATE

In his view, the terminal rate should be one which permits the maintenance or even strengthening of the credibility of monetary policy.

"The decline in inflation is likely to become more complicated in 2026, as the impact on prices of the fiscal measures proposed to Congress will materialize. In addition, it will be important to see how much uncertainty arises from the renegotiation of the USMCA and what adjustment will be made to the minimum wage," Guzman said.

The central bank’s inflation projections for 2026 are optimistic, he added.

"The combined effect of these factors will limit the possibility of continuing to adjust the rate."

Guzman pointed out that the board has always had the intention of bringing the interest rate to its neutral level at some point. (See MNI BANXICO WATCH: Cuts To Continue, Two 2025 Meetings Left)

"The difficult part is determining when and at what pace. As communication places less emphasis on the need for monetary policy to remain in restrictive territory, the reasonable interpretation is that the board perceives it can move toward its neutral level," he said.

U.S. TRADE POLICY RISKS

While there is a high risk that U.S. President Donald Trump’s trade tariff policy creates a prolonged environment unfavorable to investment and economic growth, an unpredictable U.S. government means factors affecting Mexico’s exchange rate and inflation could change abruptly, Guzman said.

The strength of the peso has been largely determined by the behavior of the dollar, he noted, although a still-favorable interest rate differential for Mexico has also helped.

"This has created a trend whose duration has surprised everyone. No one expected that at this point we would have parity below 19 pesos per dollar. On the other hand, this is not a long-term trend. Considering inflation differentials and the greater relative vulnerability of the Mexican economy, sooner or later we will start to see a trend of the peso depreciating against the dollar," he concluded.