Economists Predict Another 25 Basis Point Cut in Interest Rates
On Thursday, November 6th, Mexico’s monetary policy decision is expected to continue the cycle of interest rate reductions, with a majority of the Bank of Mexico’s Governing Board members voting in favor, according to economists from Oxford Economics and Pantheon Macroeconomics.
Key Factors in the Decision
- Weak economic performance
- Declining general inflation towards historical averages
- Surprising stability of the Mexican peso
Economists from Pantheon Macroeconomics highlight the weakened economic activity and contained inflation at 3.8%, with underlying inflation around 4.3%, as factors that create space for the Bank of Mexico to maintain a cautious approach to interest rate adjustments.
Anticipated Interest Rate Reduction
Both firms predict another 25 basis point cut, which would be the twelfth in the cycle initiated in March 2024, the tenth consecutive cut, and the third quarter-point reduction. If accurate, the nominal interest rate would drop to 7.25%, similar to its level in December 2017 when inflation was at 6.63% (the highest in 17 years) and the underlying inflation rate was 4.87%.
Neutral Interest Rate Territory
Analysts from Barclays, Valmex, Skandia, and Rankia warn that when the nominal interest rate reaches this level, monetary policy will be approaching neutrality.
Valmex’s Economist on Interest Rate Stance
Gerónimo Ugarte, Chief Economist at Valmex, states that the current economic context does not necessitate a restrictive rate that would imply less credit and investment dynamism. He explains, “Seeing no risk of upward pressure on inflation from economic activity, the rate can be lowered to support financial system stability and foster economic activity without that being the objective.”
Real Ex Ante Rate: Gauge of Monetary Policy
The real ex ante rate, which measures monetary policy stance, is currently at 3.71%. This figure results from subtracting the nominal interest rate (currently 7.50%) from the expected inflation over 22 months, which is 3.79% according to the latest Bank of Mexico survey.
Neutrality Range and Current Position
According to the Bank of Mexico, neutrality for the interest rate lies within a range of 1.8% to 3.6%. Currently, before the anticipated cut by analysts, the rate is at the lower end of the restrictive range, only a few decimals above the upper limit of the neutrality range.
The real ex ante rate has been in restrictive territory for three years, considering the lag in policy implementation (4 to 8 quarters). Some analysts predict it will continue influencing inflation even after further reductions.
Upcoming Monetary Policy Decisions
The November monetary policy decision is the penultimate one for the year. The minutes will be released on November 20, and the final monetary announcement is scheduled for December 18.
History of Monetary Policy Restriction
The restrictive cycle began in June 2021, consisting of 15 subsequent increases that took the rate from 4% to 11.25% by March 2023. At that time, the policy restriction aimed to reverse the inflation acceleration caused by the global post-pandemic shock and supply chain disruptions exacerbated by Russia’s invasion of Ukraine.
