Error if the BdeM does not reduce the rate on Thursday, says BBVA

Mexico City. The Bank of Mexico (BdeM) must reduce the reference rate this Thursday after the recent events of volatility that occurred worldwide on Monday. Failure to do so would be a “mistake” on the part of the central bank, said BBVA, the bank with the largest presence among those operating in the country.

According to an analysis published on Tuesday, the financial institution estimates that the central bank’s governing board will cut the reference rate – the instrument that sets the cost at which businesses and families obtain financing – by a quarter of a percentage point, leaving it at a level of 10.75 percent.

In the document entitled Will the recent depreciation of the peso prevent Banxico from reducing the rate? The bank indicated that the BdeM’s monetary policy should not react to global movements, since maintaining the reference rate at current levels would be an ineffective measure.

“Extending the pause (in reducing the rate) would lead to the policy stance remaining very restrictive throughout 2024 and 2025. This would be a policy and communication error, and would put at risk the need for a cut greater than 50 basis points at the next meeting in September,” BBVA said.

He said much of the increased global financial volatility seen on Monday can be attributed to the perception that the US Federal Reserve (Fed) is behind the maximum levels of interest rates that can be had.

“The BdeM, with a much stricter stance, is already behind that level. Overall inflation in August will be much more modest and, therefore, the disinflationary trend in general inflation will resume in the next two weeks. In addition, economic activity will probably be weaker in the second half of the year,” BBVA stated.

In this regard, he noted, global financial stress should ease in the coming weeks, as the Fed chairman indicated that they are ready to begin easing monetary policy next month.

“The BdeM should look to the future and avoid policy and communication errors. We believe that the large depreciation of the peso makes this week’s move more difficult than it would otherwise be, but the conditions for cutting rates while maintaining a very restrictive stance still exist,” he said.