MNI WATCH: Banxico To Decelerate Rate Cuts Pace To 25BP

The Central Bank of Mexico is expected to decelerate the pace of its easing cycle Thursday and cut the overnight interbank interest rate by 25 basis points to 7.75%, following four consecutive 50-basis-point moves.

Banxico Deputy Governor Omar Mejia told MNI in an interview last week that the board conducted a “calibration” process in the first half of the year through a series of 50-basis-point cuts and is now considering a “gradual” approach in its upcoming decisions, adding that the monetary policy path should be sufficient to ensure inflation converges to the target. (See MNI EM INTERVIEW: Banxico Mulling More Gradual Policy - Mejia) 

Asked whether the board is evaluating a pause in its easing cycle, he said the official communication indicates that further downward adjustments continue to be considered.

All eyes will be on the forward guidance, particularly whether there’s room to continue cutting without pauses in the second quarter of the year as the interest rate approaches its neutral level.

INFLATION REBOUND

Mexico's INPC annual inflation was 4.32% in June, matching the 4.30% consensus forecast and down from 4.42% in May. Core inflation came in at 4.24%, in line with the 4.21% consensus and up from 4.06%.

Both indicators remain above the upper limit of the central bank’s 3% target range, which allows for a variation of plus or minus 1 percentage point — setting the upper limit at 4%.

Banxico cut its policy rate by 50 basis points to 8.00% last month, with Deputy Governor Jonathan Heath voting to hold at 8.50%. The board signaled further cuts ahead, without specifying their size.

Progress in bringing inflation closer to the 3% target has been the main driver behind Banxico’s aggressive easing. However, a recent rebound in inflation led to a split decision in June.

Mejia emphasized that the recent surge in Mexican inflation was caused by one-off shocks and does not appear to reflect a trend, as it was concentrated in only a few components. (See MNI INTERVIEW2: Inflation Rebound Due To Shocks- Mexico Mejia) 

Former deputy director of macroeconomic analysis at the Ministry of Finance and Public Credit, Eugenio Gomez Alatorre, told MNI in an interview that Banxico could be forced to pause its easing cycle if the inflation outlook continues to deteriorate, adding that holding rates would be the prudent move. (See MNI INTERVIEW: Banxico Could Be Force To Pause Cuts -Alatorre)