Background on the Mexican Central Bank and Its Monetary Policy
The Banco de México, Mexico’s central bank, is anticipated to continue its cycle of interest rate reductions during the upcoming meeting on Thursday, May 15th. According to analysts from Barclays, Goldman Sachs, and Pantheon Macroeconomics, this would mark the third consecutive 50 basis point cut. If their predictions are accurate, the interest rate would settle at 8.50%, completing an accumulated reduction of 275 basis points since March 2024.
Inflation Factors and Analyst Perspectives
Goldman Sachs experts have noted that inflation has remained under pressure for the past three months, driven by temporary upward factors such as agro-food products (tomatoes, avocados, beef), food establishments (lunch counters, snack shops, torteria, and taco joints), and other cooked foods. Despite this upward pressure, Goldman economists believe that moderating domestic demand and cooling labor market conditions could counteract inflation.
In April, annual inflation was recorded at 3.93%, marking three consecutive months of increase since January’s lowest rate of 3.59%.
Barclays experts pointed out that, despite seasonal noise pushing inflation upwards, “basic service prices, excluding housing and education, did not show signs of demand-side pressures.” They also highlighted that the automobile price pressure, fueled by trade uncertainty, should be moderated by a stable exchange rate, potentially paving the way for a 50 basis point cut.
Pantheon Macroeconomics strategists mentioned that recent statements from Banco de México board members reflect confidence in the disinflation process, thanks to anchored expectations close to the target of 3.5% by year-end.
However, they cautioned that significant risks remain for inflation and Banco de México’s decisions due to unresolved trade tensions with the United States, threatening financial stability and exchange rates, as well as potential impacts from rising U.S. goods prices on Mexico’s underlying good inflation.
Mexico’s Interest Rate in the Context of Latin American Emerging Markets
Given Mexico’s status as an emerging economy vying for capital, it is crucial to compare its performance against other emerging markets with similar risk levels, such as those in Latin America.
In Latin America, three markets are currently in the process of normalizing their interest rates: Chile, Colombia, and Peru. These countries initiated rate cuts before Mexico.
- Chile: Started in October 2022, taking the rate from a maximum of 11.25% to 5% in December 2023, with an accumulated reduction of 625 basis points across 11 adjustments.
- Colombia: Began in December 2023, reducing the rate from a maximum of 13.25% to 9.25% in May 2024, accumulating a reduction of 400 basis points across 10 movements.
- Peru: Accumulated a reduction of 325 basis points across 13 movements since September 2023, lowering the rate from 7.75% to 4.50%.
Among the three active cases of interest rate normalization, Mexico maintains the highest rate at 9%, or 8.50% if the expected reduction by the mentioned analysts is completed.
Key Questions and Answers
- What is the expected interest rate reduction? Analysts predict a third consecutive 50 basis point cut, potentially lowering the interest rate to 8.50%.
- What factors are driving inflation in Mexico? Temporary upward pressures include agro-food products (tomatoes, avocados, beef), food establishments, and other cooked foods.
- How are Mexico’s interest rates compared to other Latin American emerging markets? Among Chile, Colombia, and Peru, Mexico currently has the highest interest rate at 9%, or 8.50% if the anticipated reduction occurs.
