The Central Bank of Mexico (Banxico) published its quarterly inflation report for 1Q24. Their inflation forecast path remained unchanged relative to the one published in May’s monetary policy statement, where they increased headline and core inflation forecast paths. The tone of the inflation environment in the report was also similar to May’s statement. While core inflation continues to fall driven by the core goods index, services inflation remains persistent.
The central bank reduced its 2024 GDP growth forecast to 2.4% (previously at 2.8%) explained by a softer than expected activity evolution in 1Q24. Still, the report notes that strong fiscal expenditure will be a driver for internal demand in the next months, mainly reflected in 2Q24, although there is uncertainty regarding its magnitude. For 2025, the GDP growth forecast remained unchanged at 1.5%, reflecting a softening of internal expenditure which would be mitigated by a resilient external demand.
In the press conference, most board members seemed open to cut the policy rate in the next meeting. First, Governor Victoria Rodriguez noted that the headline and core inflation gap is narrower now than in previous years. In this context, we are in a stage where we can consider adjustments in the reference rate, depending on inflation evolution. Similarly, deputy governor Galia Borja emphasized there is an evident improvement in the disinflationary process although there is work to be done. In that context, there is space for a rate calibration/adjustment in the coming meeting. Finally, deputy governor Omar Mejía mentioned the monetary restrictiveness level achieved can be adjusted as we have a balance of risks for inflation less adverse.
Our take: Overall, the tone of the inflation report is similar to May’s monetary policy statement, with a cautious tone on the inflation environment (persistent services CPI), but open to adjust the reference rate in the coming meetings given the progress achieved in the disinflationary process. Comments from Board members in the press conference also suggest that most of them are open for a rate cut in the next meeting. Our base case is for Banxico to cut its policy rate by 25-bp in the June 27 meeting (reaching a level of 10.75%). We think further rate cuts are likely during the rest of the year, but with another pause in between given still lingering risks to inflation. In total, we expect four rate cuts of 25-bp and a pause during the rest of the year, taking our end of year policy rate estimate to 10.00%.