Background on Banco de México and Its Role
Banco de México, often abbreviated as Banxico, is the central bank of Mexico. It plays a crucial role in maintaining price stability and fostering the smooth functioning of financial markets. The Junta de Governo, its governing body, is responsible for setting the benchmark interest rate, which influences other interest rates in the economy.
Recent Monetary Policy Meeting and Rate Cuts
During the third monetary policy meeting of 2023, three members of Banxico’s Junta de Governo indicated that further rate adjustments of 50 basis points (bp) might be necessary in the ongoing cycle of cuts. This comes after a third consecutive 50 bp reduction, bringing the benchmark rate to 8.50%.
Key Points from the Meeting Minutes
- Differential with the Fed: As the benchmark rate moves closer to neutrality, the differential with the Federal Reserve (Fed) in the United States will gain more significance.
- Neutrality Range: The neutral rate range is estimated to be between 1.8% and 3.6%. The further the real ex-ante rate is from this range, the more restrictive the monetary policy becomes.
- Future Monetary Policy Graduality: Some members suggested that future monetary policy decisions might require greater gradualism as the differential with the Fed becomes more relevant.
- Economic Outlook: While some members see potential for more economic slack, one member highlighted the risk of a mild recession due to the current stagnation period.
Expert Opinions and Future Implications
Pamela Díaz Loubet, an economist at BNP Paribas for Mexico, noted that the meeting minutes suggest a shift away from unanimous monetary policy decisions. Out of eight rate cuts in the current cycle, only two did not result in unanimous agreement.
The current differential between the Mexican benchmark rate and the Fed’s federal funds rate is around 450-475 basis points, similar to the historical average between 2008 and 2019. This range implies that there might be room for further reductions in the differential, considering the weakened US dollar and stable peso exchange rate.
Jaime Álvarez, vicepresidente de inversiones at Skan, explained that the real ex-ante rate serves as an incentive for investors to remain in the Mexican market during uncertain times. As this rate decreases, Banxico moves closer to the neutral rate, balancing inflation and GDP growth.
Key Questions and Answers
- What is the current benchmark rate set by Banxico? The current benchmark rate is 8.50%.
- What is the real ex-ante rate, and how does it influence investors? The real ex-ante rate is currently at 4.79%. It acts as an incentive for investors to stay in the Mexican market during uncertain times.
- What is the neutrality range for the benchmark rate? The neutrality range is estimated to be between 1.8% and 3.6%.
- What are the potential future implications of further rate adjustments? Further rate cuts could lead to greater gradualism in monetary policy decisions and potentially a mild recession if the current stagnation period deepens.
