MNI INTERVIEW: Banxico To Pause, Cycle Low Depends On Prices

The Central Bank of Mexico signaled a pause at its next meeting in February, former Banxico director and advisor Federico Rubli Kaiser told MNI, adding that the board might deliver at most three 25-basis-point cuts this year depending on how inflation evolves.

"I think there is an indication of pause at the next meeting. I’m not sure about further ahead, but at the next meeting, yes. And I believe that pause would be driven by the inflation pressures we’re going to see in January," Rubli, now an associate advisor at MAAT Consulting, said in an interview.

He mentioned that January will bring price shocks, some of which seasonal at the beginning of the year.

"The evolution of inflation in January will be key for that February decision,” he said.

“The forward guidance was also expressed in a very cautious way, suggesting that over the course of the year they would probably do two, at most three 25-basis-point adjustments, but not more than that. In that sense, I think we can expect a pause at the next meeting.”

The level of the terminal rate will depend on inflation data, he said. (See MNI BANXICO WATCH: Guidance Shift Suggests Banxico Pause)

Banxico cut its overnight interbank interest rate by 25 basis points to 7.00% last month, as expected, with Deputy Governor Jonathan Heath again dissenting in favor of holding steady. The board did not signal a cut at the next meeting as it had done in previous meetings, and instead said it would "evaluate the timing for additional reference rate adjustments."

DISSENT VOTE

In the minutes, Heath argued that Banxico needs to thoroughly evaluate the time required not only to reverse the increasing upward trend exhibited by core inflation in 2025, but also to calibrate the magnitude of a possible reversion in non-core inflation.

"I agree with what Jonathan Heath say, because he has always been very cautious and has always sent the signal that these kinds of adjustments must be handled with great care, especially because he analyzes core inflation very thoroughly," Rubli said.

Heath also said that if the board sees that convergence towards target will not be attained, it must evaluate the possibility of increasing the target rate once again at a later stage.

"I also agree with what Heath expressed in the minutes, conveying the message that a possible increase in the future shouldn't be ruled out," the former Banxico director noted, adding that he sees no real possibility of having to hike rates this year.

Market participants do not believe the central bank will bring inflation down to the 3% target in the third quarter of this year as projected by the board, he said. He expects inflation to reach 3.9% in 2026.

Over the longer-term, the U.S. incursion into Venezuela could eventually affect the Mexican oil market, since U.S. administration of the Venezuelan oil industry would lead to the displacement of Mexican exports, he said.

In addition, there could be a possible decline in international crude prices, with fiscal consequences for Mexico, as well as a potential weakening of Mexico’s negotiating position in the USMCA.