“We thought that if Banxico did not start the cuts in August, it would be very difficult to do so in September,” said Arely Medina, research economist at Citibanamex’s Economic Studies.
The specialist points out that in September, in view of the discussion in Congress of the law on the Judiciary, the exchange rate is expected to continue to suffer episodes of high volatility that will no longer allow the Governing Board to make downward adjustments.
“The Bank of Mexico defied the monetary turbulence and depreciation pressures on the peso by cutting the interest rate by 25 basis points. This move resumes the cycle of cuts that had been put on hold. The bank has taken an unnecessary risk,” said Alfredo Coutiño, director for Latin America at Moody’s Analytics.
While Coutiño considered Banxico’s decision to be “imprudent” due to its lack of commitment to the priority mandate of price stability, the Citibanamex economist said it was a move that should have happened since the cuts began last March.
For Pamela Diaz, chief economist at BNP Paribas in Mexico, the Governing Board focused on the fact that the rate was too high and that non-core inflation – which is an inflation in which monetary policy has no influence – will reverse in the following months.
“In the review of inflation estimates, we noted that inflation is occurring exclusively in the short term, but there is neither a delay in inflationary convergence nor changes in underlying inflation, suggesting that Mexico is not anticipating a transfer from non-core inflation to underlying inflation,” Díaz said.
However, the BNP Paribas economist said that she was not entirely convinced by the idea that prices for agricultural products, fruits and vegetables (which had double-digit increases in July) do not affect inflation.
“We are not so comfortable with the idea that there will not be a transfer to underlying inflation. For us, this means that, although there is still no evidence of this transfer, the trend we are seeing in the component does not lead us to affirm that such a transfer cannot occur,” he said.
Banco de México has raised its short-term inflation forecasts: it expects inflation in the third quarter of the year to be 5.2% from the 4.5% it previously estimated.
For the fourth quarter of this year, inflation is expected to be 4.4% from 4% previously, and for the first quarter of 2025, inflation is expected to be 3.7% from 3.5% previously.
Experts believe that the Bank of Mexico is expecting weakness in the Mexican economy, in which consumption will decrease and there will be a slower pace of employment growth, which will help inflation to subside.
“In the forward guidance paragraph, Mexico is going to take into consideration future growth, it is going to consider global shocks as they evolve and the effects of the weakness of economic activity, so this introduction suggests that it is giving some weight to economic activity,” Díaz said.
Analysts also warn that the central bank has inflation estimates that are well below what the consensus expects. BNP Paribas expects inflation in the last quarter of 2024 to be 5.2%, a rate well above the 4.4% that the central bank has.
Were there political overtones in Banxico’s decision?
Some analysts on social media noted that the members who voted to lower the interest rate were chosen by the current government.
Omar Mejía, Victoria Rodríguez and Galia Borja were the members of the Board who voted to lower the rate, while Jonathan Heath and Irene Espinosa voted to maintain it.
Asked if they saw a political bias in favor of growth rather than inflation, Arely Medina rejected this possibility.
“Not at all. I believe that Banxico has shown its autonomy in every sense in the sense that it makes decisions based on the economic cycle, but not based on the political cycle,” he said.
He added that politics definitely has an impact on the economy, but that the central bank has shown its autonomy.
