BdeM surprises with rate cut despite price increase

Mexico City. The governing board of the Bank of Mexico (BdeM) decided on Thursday, in a split decision, to cut its reference rate by a quarter of a point to leave it at 10.75 percent. It stressed that the monetary stance will continue to be restrictive, in line with the commitment to lead inflation to the 3 percent target, with a variation interval of one point. It was a surprising announcement, given that the group of analysts did not expect movements due to the increase in inflation and the recent volatility of the financial markets.

The reduction in the rate that determines the cost at which companies and families in Mexico finance themselves occurs, according to the central bank itself, in a context in which the financial markets in Mexico have suffered from the volatility that international markets have shown in recent days, a depreciation of the peso and low economic growth.

However, the monetary policy statement justified the decision by arguing that the increases reflected in general inflation have been driven by the non-core component – products with a more volatile price, which depend on factors such as the weather, including fresh foods – while the core item, from which the most volatile components are eliminated and therefore better reflects the trajectory of inflation, has accumulated 18 months of decline.

The BdeM adjusted upwards its forecasts for general inflation in 2024 and the first quarter of 2025, and for the underlying component it only revised downwards the forecast for the third quarter of 2024. It also expects that the inflationary shocks that have affected the non-core component will dissipate in the short term and that the underlying component will continue to decline. It anticipates that general inflation will converge to the 3 percent target in the fourth quarter of 2025.

He said the inflation forecast is biased upwards, with risks such as the persistence of underlying inflation, further exchange rate depreciation, higher cost pressures, climatic impacts and escalation of geopolitical conflicts.

The governor of the BdeM, Victoria Rodríguez Ceja, and the deputy governors Galia Borja Gómez and Omar Mejía Castelazo voted to lower the rate, while the deputy governors Irene Espinosa Cantellano and Jonathan Heath voted to keep it at 11 percent.

The central bank is monitoring factors such as global shocks and the effects of weak economic activity.

For Citibanamex, the central institute’s decision was correct; however, it stressed that it was inconsistent with its opinion, as it had predicted that it would not do so. With this scenario, the bank indicated that it maintains its estimate that the reference rate will close 2024 at 10 percent and 2025 at a level of 8 percent.

For its part, Valmex emphasized the new price forecasts, which reflect higher overall inflation for the remainder of the year and early 2025. If this scenario comes true, it explains, the next cuts will be continuous, a quarter of a percentage point in each of the three announcements scheduled for the remainder of 2024, which will take the rate to a level of 10 percent. However, the risk is that underlying inflation will reverse its downward trajectory, which opens the possibility of a pause in the monetary stance.

Go for More highlighted the surprising of the decision of the BdeM, pointing out that the Inflation does not yet justify a cycle of declines, but only tactical adjustmentsFor this reason, he said they maintain their forecast that the year will close with a rate of 10.5 percent.

Meanwhile, Monex explained that it seemed that the central bank would not cut the rate for the moment in the face of episodes of volatility, but the opposite happened. With the cut, he pointed out, it is betting on the downward trajectory of underlying inflation and the transitory nature of shocks in the non-core component, but it gives greater weight to a weaker economy than anticipated.

Furthermore, the bank does not rule out a new cut at its next monetary policy meeting, but predicts that the level will remain at 10.5 percent by the end of the year.

From another perspective, Invex analysts highlighted that the decision of the majority of the central bank members reduces the pressure on the country’s debt service and therefore on the balance of public finances. A major risk we see is price contamination in processed foods and services if non-core prices pick up again. We do not rule out a further rise in market inflation expectations..