Background on Banco de México and Its Role
Banco de México, often referred to as Banxico, is the central bank of Mexico. It plays a crucial role in maintaining price stability and fostering the country’s financial system’s efficiency. Banxico sets short-term interest rates and implements monetary policy to influence inflation, economic growth, and exchange rates.
Expert Predictions on Upcoming Rate Decision
Analysts from BNP Paribas, Goldman Sachs, and Banamex anticipate that Banco de México will reduce the benchmark interest rate by 50 basis points during its decision on Thursday, June 26. This prediction aligns with the market consensus gathered by Citi’s survey on June 20, just two days before the US bombing of Iranian nuclear facilities.
Inflation Concerns and Economic Data
Pamela Díaz Loubet, BNP Paribas’s economist for Mexico, explained that the recent uptick in underlying inflation during the first half of June indicates that service price pressures are not easing due to economic slowdown, as the central bank had expected.
- Mixed inflation data and the Indicador Oportuno de Actividad Económica (IOAE) for April suggest no significant price deterioration from geopolitical uncertainty, which would otherwise be transmitted through energy prices or the exchange rate.
- Alberto Ramos, Goldman Sachs’s economist for Latin America, believes that inflation data does not hinder Banco de México from continuing its rate-cut cycle.
Ramos stated, “The new uptick in underlying inflation along with the rigidity of service prices indicates the need for caution in short-term rate calibration, but the possibility of a 50 basis point cut in this week’s decision remains latent.”
Banxico’s Rate-Cut Cycle and Future Guidance
If the analysts’ predictions prove accurate, this week’s announcement will conclude the phase of four 50 basis point rate cuts initiated in February. Nine cuts since March 2024 have lowered the benchmark rate from a maximum of 11.25% to the current 8.50%, with expectations of further reductions to 8%.
- Should the rate be lowered to 8% as anticipated, the differential relative to the US will stand at 350 basis points.
- Historically, Mexico has maintained a 400 basis point differential to attract capital, as explained by international analysts.
Banxico’s Shift in Narrative
In a divided 4-to-1 decision, Banamex economists Paulina Anciola and Guillermina Rodríguez predict a 50 basis point cut. They also expect Banxico to adopt a more cautious tone, signaling that future rate adjustments will revert to a 25 basis point pace.
Key Questions and Answers
- What is Banco de México’s role? Banco de México, or Banxico, is the central bank of Mexico responsible for maintaining price stability and fostering the efficiency of the country’s financial system. It sets short-term interest rates and implements monetary policy to influence inflation, economic growth, and exchange rates.
- Why are analysts predicting a rate cut? Analysts from BNP Paribas, Goldman Sachs, and Banamex anticipate a rate cut due to underlying inflation concerns and the need for caution in short-term rate calibration.
- What will be the impact of a 50 basis point cut? If implemented, this rate cut will bring the benchmark interest rate closer to the historical differential that Mexico maintains relative to the US to attract capital.
- How will Banxico communicate its future intentions? Banxico is expected to adopt a more cautious tone, signaling that future rate adjustments will revert to a 25 basis point pace.
