Banco de Mexico (Banxico) kept unchanged its policy rate at 11.25% in a unanimous decision, in line with our forecast and market expectations (as per Bloomberg). The monetary forward guidance included in the statement, suggests rate cuts this year are unlikely given a complex and uncertain inflation outlook with upward risks: “it considers that it will be necessary to maintain the reference rate at its current level for an extended period.”
While the statement recognized the economy started to undergo a disinflationary process, it noted a complex inflation outlook with the balance of risks still biased to the upside. Upside risks for inflation include core inflation persistence, currency depreciation, greater cost related pressures and pressures in energy or agricultural prices. On the other hand, downside risks for inflation include greater than anticipated slowdown of the world economy, lower pass-through effect from cost related pressures, better functioning of supply chains and a larger than anticipated effect from AMLO’s plan to tame inflationary pressures.
Headline inflation was revised down marginally (relative to the previous statement) for the next three quarters, while core inflation forecast path remained practically unchanged. Quarterly annual headline inflation was reduced 30 bp at most in each of the last three quarters of 2023, reaching 4.7% and 3.1% in 4Q23 and 4Q24, respectively. Quarterly annual core inflation stood at 5.0% and 3.1% in 4Q23 and 4Q24, respectively.
Our end of year policy rate forecast stands at 11.25%, which implies no rate cuts. The central bank is unlikely to cut its policy rate this year given a still difficult disinflationary process and our view of the Fed holding rates throughout 2023. We think that the central bank will only start cutting rates during the first half of next year.
Joao Pedro Resende