Mexico: Central Bank decreases rates in August
Latest bank decision: At its meeting on 8 August, the Central Bank decided to lower the target for the overnight interbank interest rate by 25 basis points to 10.75%.
Monetary policy drivers: The Central Bank’s decision was primarily influenced by a prolonged period of weak economic activity, and by the downward trend in core inflation so far this year—notwithstanding the recent rise in headline inflation. Core inflation returned to the upper bound of the Bank’s 2.0–4.0% target range in July, the first time core inflation has not been above-target since early 2021.
Policy outlook: The Central Bank hinted at further rate cuts going forward. This is in line with our panelists’ projections for between 25 and 125 basis points of additional cuts by the end of this year.
Panelist insight: Giving their take on the outlook, BBVA analysts said:
“Board members will likely continue to have differing points of view in terms of the inflation outlook, likely leading to additional split decisions in future meetings. Although we think that the current real rate continues to be overly restrictive and the Fed is set to start cutting rates in September, which will give further room for Banxico to cut rates, we anticipate that the rate-cut cycle will continue to be slower than warranted. We expect one additional rate cut this year (in November).”
In contrast, Itaú Unibanco analysts were more dovish:
“Our base scenario is for Banxico to cut its policy rate by 25-bp in each of the remaining meetings of the year (reaching an end of year level of 10.00%) but with the risk of a pause depending on market volatility and/or ugly core inflation surprises.”