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We still expect a 25-bp rate cut in March.
2024/02/29 | Andrés Pérez M. & Julio Ruiz

The Central Bank of Mexico (Banxico) published its quarterly inflation report for 4Q23. The report recognized the disinflationary progress of core inflation, but highlighted the persistence in services inflation which is associated to catch-up costs after the pandemic. The report also noted the reversion of non-core inflation, which was a concern for some board members in the most recent minutes. Their inflation forecast path remained unchanged relative to February’s monetary policy statement.


The central bank reduced its 2024 GDP growth forecast to 2.8% (previously at 3.0%) due to a weaker than expected 4Q23. The central bank expects activity to slow to 1.5% in 2025, reflecting their expectation of a fiscal consolidation which will be mitigated by a better evolution of the U.S. economy.


In the press conference, most board members seemed more willing to cut the policy rate in the next meeting, in our view.  On the one hand, board members Mrs. Borja and Mr. Mejia, noted the progress in the disinflationary process, while the latter also mentioned a less adverse inflation environment. The Governor, Mrs. Victoria Rodriguez, noted that core inflation better reflects the trend while also downplaying, in our view, the importance of rate differentials with the U.S., as it was mentioned as “a factor” that is considered for the monetary policy decision. On the other hand, board member Mr. Heath noted that the decision to cut the policy rate in March or May will depend on how restrictive the real ex-ante policy rate is. In his opinion, it should be kept inside the range of 7-7.5% (which we estimate at 7.42%). Finally, board member Mrs. Espinosa seemed more cautious on the inflation outlook, noting the next monetary policy decision will be data dependent.


Our base case remains for the central bank to cut its policy rate by 25-bp in the March meeting. We cannot rule out a split decision given some members remain cautious on the inflation environment. Our end of year policy rate forecast is at 9.50%.