Ciudad de México — Banco de México (Banxico) will keep its benchmark interest rate at 11.25% this Thursday, August 10, as the monetary authority braces itself for a cut in November. The central bank will nonetheless uphold its restrictive tone, as it aims for inflation to converge at its 3% target.
Three analysts consulted by Bloomberg Line agreed that Banxico will need to cut the interest rate as early as November as failing to do so would lead to a continued increase in the ex-ante real interest rate, with inflation decelerating and inflation expectations decreasing as well.
The consensus among the experts surveyed as part of Citibanamex’ Expectations Survey is unanimous, with all 33 participants expecting the central bank to maintain the interest rate at 11.25% for the third consecutive time.
Banxico’s Governor, Victoria Rodríguez Ceja, stated on May 31 during the quarterly inflation conference that the Board of Governors would take longer than the time span between two monetary policy decisions to evaluate inflation. The two monetary decisions referred to by the governor were those on June 22nd and August 10th.
Banxico will remain cautious about inflation: José Carlos Sánchez
José Carlos Sánchez, senior economist at HSBC Mexico, is expecting Banxico to begin bringing down its key rate in November, which does not imply a more lenient central bank stance towards inflation or a drop real terms, but rather that the decision will lead the nominal rate to a more stable real position.
He believes that the rapid decline in inflation expectations will open the possibility for Banxico to cut the benchmark by 25 basis points without impacting the rate in real terms.
As an example, he pointed out that if the central bank were to get to January 2024 with a nominal rate of 11.25% and 12-month inflation expectations at 4%, the rate would be around 7.25% in real terms.
In the first half of July, HSBC Mexico expected the interest rate cut to occur in September; however, the forecast was moved to November upon observing a decline in inflation expectations for the end of 2023 and a Banxico stance that indicated the need to maintain the reference rate at its current level for an extended period.
“Banxico maintains a very cautious tone regarding inflation. In fact, if you compare the monetary policy communication from May to June, the forward guidance remained virtually unchanged. We perceive Banxico as remaining cautious, which is why we pushed our rate cut estimate to November,” Sánchez said.
November rate cut would be a “pause”: Pamela Díaz Loubet
Pamela Díaz Loubet, Chief Economist for Mexico at BNP Paribas, estimated that Banxico’s decision to keep the rate unchanged will be unanimous, with limited changes in the monetary policy communication regarding forward guidance, but with nuances that could provide insight into when the bank might consider starting the rate cut cycle.
“Banxico has maintained a very data-dependent approach since this monetary pause began, so it could be challenging in such a complex environment to have a communication that deviates from this cautios,” Díaz Loubet said.
The analyst’s forecast for a 25-basis-point rate cut in November is based on lower core inflation that month due to seasonality. However, this does not imply that the rate cut cycle will start in Mexico.
She emphasized that after the November cut, a brief monetary pause is expected in the first quarter of 2024, followed by a resumption of the rate cut cycle in the second quarter of next year, depending on how inflation evolves.
As for interpreting Banxico’s “extended period” forward guidance, she commented that, in her view, this is defined by the point at which 12-month inflation expectations fall below a certain level.
BNP Paribas’ level for 12-month inflation is 4.25%, which would imply that the ex-ante real rate would go to levels of 7% or 7.25%. “What we’re seeing is how that expectations variable evolves. Rather than a specific timeframe, the extended period responds to certain economic variables reaching certain levels.”
Banxico rate cut delayed until November due to Fed hikes: Joan Domene
Joan Domene, Chief Economist for Latin America at Oxford Economics, delayed his forecast for Banxico’s 25-basis-point rate cut from September to November, with the recent action by the Federal Reserve (Fed) as the main reason for the change.
He argued that his initial prediction for a rate cut in November was primarily based on the Fed hiking further. On July 26th, the Federal Reserve raised the interest rate by 25 basis points to a range of 5.25% to 5.5%, leaving the door open for more hikes.
“If the market’s anticipated scenario of one or even two more increases materializes, that would push back my expectation to November... it will all depend on inflation surprises,” he added.
Domene, who was recognized by Focus Economics in 2023 as one of the top interest rate forecasters in Mexico, said that the Banxico-Fed differential is already wide (600 basis points), even more than it has been in recent years. “Perhaps Banxico wouldn’t feel comfortable starting to reduce rates at a time when the Fed is still raising rates.”
Regarding Banxico’s forward guidance to maintain the rate at 11.25% for an extended period, the analyst said that this concept worked to limit market expectations of cuts as early as this year.
Domene said that some members of Banxico’s Board of Governors have talked about maintaining the ex-ante real rate elevated for a while; however, it should be noted that as inflation expectations decrease, that rate will continue to rise and could reach up to 7.5%, a level that would be more than sufficient.