Experts Warn of Neutrality Threshold and Inflation Pressure
As the Banco de México continues its cycle of rate cuts, potentially lowering the benchmark interest rate to 7.25% by November or December, experts from BNP Paribas and Invex caution that this action risks crossing into a neutral monetary policy stance, which could lead to increased inflationary pressures.
From Restrictive to Dovish Policy
Humberto Calzada, Chief Economist for Latin America at Rankia, explains that the current restrictive monetary policy, which has been in place for over 21 months to stabilize inflation, would transition into a dovish or accommodative stance. This shift aims to boost money supply and push inflation higher.
Both BNP Paribas’s Mexico economist, Pamela Díaz Loubet, and Invex Chief Economist Ricardo Aguilar Abe, agree that lowering the rate below 7.25% or 7% would be risky, as inflation remains elevated.
Services Inflation Resilience and Risks
Díaz Loubet highlights that service prices have shown limited responsiveness to economic cycles since the pandemic. Factors such as cost catch-up, construction price increases, structural elements like competition, and housing demand adjustments due to gentrification or property rights have contributed to this resilience.
Aguilar Abe adds that service inflation has displayed notable resistance, which could intensify if economic activity rebounds in the coming year. This poses an additional risk for the Banco de México to meet its inflation target of 3% by the third quarter, as per their own forecast.
Risks of Unanchored Inflation Expectations
Invex and BNP Paribas experts explain that if monetary conditions are eased without reaching the inflation target, it could lead to unanchored inflation expectations. Calzada clarifies that a neutral rate is established when inflation aligns with the target and GDP grows at its potential, requiring no monetary policy intervention.
However, if the neutral rate is set with inflation one percentage point above the target and negative output gaps, it risks causing demand-side pressures due to altered economic variables.
Optimistic Yet Cautious Inflation Forecasts
Díaz Loubet notes that the Banco de México’s inflation convergence forecasts to the target for the third quarter of the next year remain optimistic compared to market consensus.
She adds that by the end of this year, likely in December, there will probably be a delay in the Banco de México’s inflation convergence estimates, making it difficult to justify further rate cuts.
Expert Consensus on Future Rates
BNP Paribas and Invex experts anticipate that the rate will end this year at 7.25%, while Rankia’s specialist expects it to be at 7%.
Key Questions and Answers
- What is the current concern of Mexico’s central bank rate cuts? Experts warn that continuing the cycle of rate cuts could push the benchmark interest rate to 7.25%, entering a neutral monetary policy stance that risks increased inflationary pressures.
- How has service inflation behaved since the pandemic? Service prices have shown limited responsiveness to economic cycles, with factors like cost catch-up, construction price increases, competition, and housing demand adjustments contributing to their resilience.
- What are the risks of unanchored inflation expectations? If monetary conditions are eased without reaching the inflation target, it could lead to unanchored inflation expectations, causing demand-side pressures due to altered economic variables.
- What are the experts’ forecasts for inflation convergence? While optimistic, the Banco de México’s inflation convergence forecasts to the target for the third quarter of the next year are likely to experience delays, making further rate cuts unlikely.
- What is the expected interest rate by year-end according to experts? BNP Paribas and Invex experts anticipate the rate will end this year at 7.25%, while Rankia’s specialist expects it to be at 7%.
