Mexico: Central Bank cuts rates in March
At its meeting on 21 March, the Governing Board of the Bank of Mexico (Banxico) reduced the overnight interbank interest rate target from 11.25% to 11.00%.
The decision to cut rates was driven by a sustained fall in core inflation in recent months, and by the Central Bank’s belief that the disinflation process would continue going forward; Banxico sees both headline and core inflation returning to the 2.0–4.0% target range in H2 2024.
Banxico did not give explicit guidance on what its future monetary policy moves would be, though the Bank should have room to continue cutting rates in light of an expected decline in inflation, likely monetary easing by the Fed, and given interest rates are still at a historically high level. Our Consensus is for over 150 basis points of further rate cuts this year. That said, recent upside surprises to inflation and economic activity data in the U.S. could lead the Fed to keep rates higher for longer; there is therefore a risk that Banxico follows suit in order to protect the peso.
On the outlook, Itaú Unibanco analysts said:
“The data dependent forward guidance for further rate cuts suggests, in our view, that rate cuts are likely in the coming meetings. Our base case, remains for the central bank to cut by 25-bp in each of the policy meetings of the year, reaching an end of year level of 9.50%, still well above neutral.”
Goldman Sachs’ Alberto Ramos was more dovish:
“In our assessment, the data-dependent mode likely implies that another moderate 25bp rate cut is the most likely outcome at the May meeting, unless the data vector is clearly unfriendly, or the global monetary winds turn materially more hawkish. At this juncture we continue to expect the policy rate to reach 9.00% by end-2024.”