The central bank of Mexico (Banxico) cut its policy rate by 25-bp, in line with our call and Bloomberg market consensus to 10.75%. It was a split decision, with deputy governors Irene Espinosa and Jonathan Heath voting for a pause, as we expected. The forward guidance was left unchanged relative to June’s monetary policy statement suggesting further rate cuts will be data dependent (in our view): “Looking ahead, the Board foresees that the inflationary environment may allow for discussing reference rate adjustments”. The Board will consider global shocks that will continue fading and the effects of the weakness in economic activity
Banxico's headline inflation forecast was revised slightly to the upside in the short term, but core inflation was left practically unchanged. Quarterly annual headline inflation increased to 4.4% in 4Q24, compared to June’s statement estimate of 4.0%. Still, both headline and core inflation are expected to converge to 3.0% in the last quarter of 2025, same as June’s monetary policy statement. In our view, keeping core inflation forecasts unchanged suggests that either Banxico sees the recent depreciation as temporary, or the effect of the depreciation could be offset by weaker activity (balance of risks for activity is biased to the downside).
The balance of risks for inflation remained tilted to the upside, with similar risks to inflation. Upside risks for inflation include persistence of core inflation, currency depreciation, greater cost-related pressures, climate-related impacts, and the intensification of geopolitical conflicts. On the other hand, downside risks for inflation include a faster than anticipated slowdown of activity, lower pass-through from cost-related pressures and a lower-than-anticipated effect of the peso’s depreciation on inflation.
Our take: Overall, the tone of the statement suggests further rate cuts are possible in the remaining meetings this year, dependent on data. This is consistent with the forward guidance and the fact that core inflation forecasts were kept unchanged. Our base scenario is for Banxico to cut its policy rate by 25-bp in each of the remaining meetings of the year (reaching an end of year level of 10.00%) but with the risk of a pause depending on market volatility and/or ugly core inflation surprises. Weaker activity outlook and higher odds of the Fed cutting its policy rate several times this year also supports our call. The meeting’s minutes will be published on August 22 and the next monetary policy meeting is scheduled for September 26.