Experts Predict Further Interest Rate Cuts Despite Rising Inflation
Key Figures and Their Perspectives
On September 25, analysts and scholars anticipate that the Board of Governors of Banco de México will implement another reduction in the reference interest rate, despite ongoing inflation pressures.
Luis Pérez Lezama, Director of Public Finance at SAVER research center, believes that the Board members will apply another cut to the rate, stating, “Now we are forecasting the last bastion of restrictive monetary policy.” He highlights that inflation’s resistance to decline, as shown in the first half of September, reflects persistent cash flow promoting consumption.
Raymundo Tenorio, emeritus professor at ITESM and monetary policy expert, concurs with Lezama’s prediction of a 25 basis points reduction for the September decision, placing them “on the brink of restrictive monetary policy.” However, Tenorio warns that this move will face opposition from Sub-Governor Jonathan Heath and suggests monitoring company credit access to identify when monetary policy becomes less restrictive.
Market Expectations and Analyst Opinions
Humberto Calzada, Chief Economist for Latin America at Rankia consultancy, also expects a 25 basis points reduction in the rate to 7.50% during the September decision, following a new cut. This would complete a 250 basis points reduction year-to-date from the initial 375 basis points cycle starting in March 2024. Calzada estimates that the restrictive policy threshold will be reached when the nominal rate hits 7.25%, potentially occurring in November or December.
According to the latest Citi survey results, 37 out of 38 panelists predict a new 27 basis points rate cut in September by the Board of Governors. Only Vector economists anticipate a pause until November, when they resume the cycle.
Risks and Considerations
Experts caution that continuing rate cuts amid a negative product spread and inflation far from the target could lead to an expectations unanchoring risk. Raymundo Tenorio emphasizes that if the service inflation remains at 4.52% (as in early August) and goods at 4.19%, the Bank’s subjacent inflation reference would be uncertain.
Tenorio also notes that some Board members’ room for adjusting Mexico’s rate while maintaining the interest rate differential from the US indicates excessive optimism. He stresses that to determine if the reference rate has surpassed the restrictive monetary policy threshold, one should observe credit amounts granted to businesses and individuals.
Key Questions and Answers
- Q: What are experts predicting regarding the interest rate decision by Banco de México?
- Q: How do experts view the current inflation situation?
- Q: What are the risks associated with continued rate cuts amid inflation pressure?
- Q: How will we know if the monetary policy has become less restrictive?
A: Analysts and scholars predict that the Board of Governors will implement another reduction in the reference interest rate, despite ongoing inflation pressures.
A: Inflation’s resistance to decline reflects persistent cash flow promoting consumption, with no significant public works or job creation certainty. Thus, internal and external consumption remains the backbone of the economic curve.
A: Continuing rate cuts amid a negative product spread and inflation far from the target could lead to an expectations unanchoring risk.
A: Monitoring credit access for businesses and individuals will help identify when monetary policy ceases to be restrictive, as credit becomes more affordable.
