Banxico May Adjust Rates in February Based on Economic Context
Jonathan Heath, deputy governor of the Bank of Mexico, mentioned that there is a possibility for the board to consider a reduction in its interest rate, which could range between 25 and 50 basis points, when it presents its monetary policy announcement in February. However, the decision will depend on the prevailing economic conditions. In its most recent announcement, the central bank began a series of cuts, reducing the rate by 25 basis points, bringing it down to 10%. Banxico estimated that the inflation situation could allow for further reductions in the cost of financing, and given the ongoing disinflation, some more drastic adjustments could be considered in the future.
Still, Heath highlighted that the potential tariffs that the United States could impose on Mexican products have created greater uncertainty over projections. At the end of November, then-president-elect Donald Trump announced tariffs for Canada, Mexico, and China. If there are no alarming announcements from Trump by January 20 and if our inflation projections remain on track or improve, there is a possibility of discussing a reduction in the benchmark rate between 25 and 50 basis points. However, this does not guarantee that such an adjustment will be implemented, as market inflation expectations, the overall economic outlook, credit rating agency perspectives, and an in-depth analysis of the persistence of inflation in services will also be taken into account. Overall inflation for the second-largest economy in Latin America was at 4.44% annually in early December, still above Banxico's target of 3%. This indicator is expected to close the fourth quarter of 2024 at 4.6% and reach the target by the third quarter of 2026.
Heath believed that the decision made by the board on February 6 may not be unanimous, given the different opinions on the need for a gradual and cautious approach to achieve the inflation target. He also sees it as unlikely for a cut greater than 50 basis points. He stated that, with current information, a benchmark rate forecast of between 8% and 8.5% by the end of 2025 seems "reasonable," but cautioned about the many variables that could influence this level as the eight scheduled monetary policy meetings unfold. When asked about the expected stagnation in economic activity for 2025 and the need to maintain a restrictive monetary policy, Heath emphasized that this stance would be upheld to ensure price stability in the country. Banxico projects that Gross Domestic Product will grow by 1.2% in 2025, lower than the 1.8% estimated for 2024. He asserted that the central bank's best contribution to economic growth is to provide an environment of price stability, which in turn will help keep interest rates lower in a context of reduced inflation expectations. Heath attributed the anticipated slowdown to the private sector's caution in investing, due to an environment filled with uncertainties and risks, along with a fiscal policy restricted by the need to reduce the deficit. However, he suggested that if this slowdown persists, it will be more likely to reach the inflation target within the projected timeframes, which could facilitate the continuation of the benchmark rate reduction until a neutral stance is achieved. For 2026, he concluded that if there are no unexpected shocks, inflation is likely to be close to 3%, which would be associated with a neutral monetary policy and a growing economy.
It is essential that both institutions and consumers stay alert to Banxico's future decisions. The current inflationary landscape and the effects of monetary policy have a direct impact on the cost of living and investment decisions. Price stability is crucial for fostering a favorable economic environment, and as seen, each rate adjustment can have significant repercussions on the economy and market expectations. Staying informed is key to making sound financial decisions.
