Experts from Goldman Sachs, Finamex, Skandia, Pantheon Macroeconomics, and Valmex Share Their Views
Analysts from Goldman Sachs, Finamex, Skandia, Pantheon Macroeconomics, and Valmex Mexican Stock Exchange (Valmex) have forecasted that the target interest rate in Mexico will likely end the year between 7.25% and 7.75%, depending on the room allowed by the exchange rate, according to a recent report.
Current Interest Rate and Its Implications
Following the latest interest rate cut, which lowered it to 8.50%, the spread over the U.S. Treasury has decreased to 400 basis points, implying a willingness to narrow the spread further. Víctor Gómez Ayala, Chief Economist for Finamex, explained that this spread serves as an incentive for investors to stay in the Mexican market during uncertain times.
Exchange Rate Impact and Inflation
The exchange rate’s behavior continues to show a moderate impact on inflation, which the Monetary Board perceives as a low-risk factor for cost transfer. Gómez Ayala anticipates that the rate reduction cycle will continue throughout the year, with an expected finish at 7.75%, a level also projected by Skandia and Pantheon Macroeconomics economists.
Neutrality Frontier and Restrictive Stance
With the projected nominal interest rate and assuming inflation expectations do not become unanchored over 12 months, the policy will be nearing neutrality but still in a restrictive position, according to the Skandia expert.
Consensus Among Analysts
All five consulted analysts predict a 50 basis points reduction in the rate for the upcoming decision on June 26. Alfredo Coutiño, Director for Latin America at Moody’s Analytics, noted that there are no surprises for market consensus since the Banco de México now guides expectations rather than accommodating market desires.
Deeper Rate Cuts Anticipated
While Goldman Sachs and Valmex experts agree that the rate reduction cycle will continue for 14 months, each anticipates a more substantial cut, bringing the rate down to 7.25% (Alberto Ramos, Goldman Sachs) or 7.50% (Gerónimo Ugarte Bedwell, Valmex).
According to the Latin America economist at Goldman Sachs, the Monetary Board has downplayed the recent surge in underlying inflation for goods, instead emphasizing that it has stayed below 4% for eight consecutive months. Consequently, they foresee further reductions in the coming five scheduled announcements, totaling 125 basis points.
Economic Weakness and Cost Pressure Mitigation
Valmex’s economist, Gerónimo Ugarte Bedwell, believes that expected greater economic weakness and lower cost pressures could help alleviate inflationary pressures. He projects that the target rate might conclude the year at 7.50% while maintaining a consistent level with the ongoing disinflation process without jeopardizing inflation expectations’ anchoring.
Banco de México’s Interest Rate Differential
Jonathan Heath, Deputy Governor of Banco de México, has stated that the interest rate differential between Mexico and the U.S. will always be part of the Banco de México’s reaction function and one of the variables monitored. Although its short-term significance in upcoming decisions (May and June) will remain close to zero, Heath projects that its relevance will increase significantly in the second half of the year.
Key Questions and Answers
- What is the projected interest rate range for the end of 2023? Analysts from Goldman Sachs, Finamex, Skandia, Pantheon Macroeconomics, and Valmex predict the target interest rate will likely end the year between 7.25% and 7.75%.
- How will the recent interest rate cut affect investor behavior? The reduced spread over the U.S. Treasury (now at 400 basis points) implies a willingness to narrow the spread further, providing an incentive for investors to stay in the Mexican market during uncertain times.
- What is the expected impact of exchange rate behavior on inflation? The exchange rate’s moderate impact on inflation is perceived as a low-risk factor for cost transfer by the Monetary Board.
- What is the anticipated path for interest rate reductions throughout 2023? Analysts predict a continued cycle of rate reductions, with the target interest rate potentially concluding the year at 7.50%.
- How will economic weakness and cost pressures influence inflationary pressures? Expected greater economic weakness and lower cost pressures could help alleviate inflationary pressures, according to Valmex’s economist.
- What role does the interest rate differential between Mexico and the U.S. play in Banco de México’s decision-making? The interest rate differential is part of Banco de México’s reaction function and one of the monitored variables, with its short-term significance expected to increase in the second half of 2023.
