Mexico’s central bank, known as Banxico, opted to keep its key interest rate unchanged at a record high for the seventh consecutive meeting on Thursday. This decision comes as the country grapples with accelerating inflation, marking the third consecutive month of price increases in January.
Banxico held its key interest rate steady at 11.25%, in line with expectations from 26 out of 30 economists surveyed by Bloomberg. Despite calls for a quarter-point cut from a minority of analysts, the central bank signaled a growing openness to considering a rate reduction in the coming months. This stance reflects the easing of core inflation, along with indications of economic slowdown.
In a departure from its previous guidance in December, Banxico removed the assertion that it would maintain rates “for some time.” Instead, it emphasized making decisions on rate adjustments based on available information in upcoming meetings, considering remaining challenges and the current restrictive policy stance.
Gabriela Siller, Director of Economic Analysis at Grupo Financiero Base, noted a shift in the central bank’s tone, suggesting it as the initial step towards a potential rate cut or a less restrictive stance.
Following the rate decision, the Mexican peso experienced losses, reaching 17.16 per dollar. Analysts cautioned against further pressure on the exchange rate if speculation persists regarding a rate cut by Banxico in March, preceding actions by the US Federal Reserve.
Interest-rate swaps declined across the curve post-decision, as traders adjusted their expectations for policy easing. One-year swap rates dropped by 4 basis points to 10.77%.
Banxico’s policymakers, led by Governor Victoria Rodriguez, emphasized a cautious approach to easing, intending for adjustments to be gradual and fine-tuned. They acknowledged the risk of prolonged high rates impacting economic activity in a cooling economy.
While headline inflation projections were raised for the first three quarters of 2024, Banxico expects inflation to converge to previous forecasts by year-end. Core inflation, a closely watched metric in Mexico, has shown a slight improvement in the first quarter despite remaining elevated.
Food prices, affected by the El Niño weather phenomenon and climate change, were the primary drivers of January’s inflation uptick. However, core inflation continued its steady decline since January 2023, reaching pre-pandemic levels.
The Mexican economy slowed more than anticipated in the fourth quarter of 2023, posting a year-on-year growth rate of 2.4%, the lowest since 2021. Analysts project a third consecutive year of output decline in 2024.
Given the overall inflation trend and a decelerating economy, analysts anticipate Banxico to commence rate cuts soon. The latest survey by Citi of local economists suggests a quarter-point reduction in March, with gradual easing expected throughout the year.
While other major inflation-targeting central banks in Latin America have embarked on rate cuts, Banxico remains cautious, reflecting the country’s relatively resilient economic performance. As core inflation continues to decelerate, the central bank awaits further evidence before adjusting its policy stance.
