MEXICO CITY – Interest Rate Cuts Ahead
Mexico’s central bank is likely set to reduce key interest rates by half this month, even with recent spikes in inflation. Analysts suggest that while cuts may happen, the pace could be tempered if inflation is kept in check.
In May, inflation rose beyond the central bank’s target of 3%, with the core inflation reaching 4.06%, marking its highest level in nearly a year.
Still, many economists surveyed seem optimistic about a fourth consecutive 50 basis points cut during the next meeting scheduled for June 26th.
“We’re thrilled about the city’s chief economist. Their efforts are commendable,” commented Julio Lewis, Mexico’s chief economist. “There’s a belief that financial restrictions are still somewhat high compared to current inflation levels.”
Gabriela Siller, head of analysis at Banco Base, also anticipates another half-point cut this month. However, she expects this to signal a pause in the financial easing cycle that began earlier this year, after hitting a peak of 11.25%.
“With inflation rising and its potential effect on long-term expectations, it might be wiser for the Bank of Mexico to consider a smaller cut of 25 basis points or even pause,” she noted.
A 50 basis points reduction would lower interest rates to 8%, the lowest in three years, which could help stimulate the flagging economy.
Moving forward, experts warn that rising inflation may cause central banks to adopt a more cautious approach to future rate changes.
“At the very least, we can expect some moderation in the bank’s communications,” said Ramse Gutierrez, co-director of investments at Franklin Templeton. “It’s reasonable to think the Bank of Mexico will tread carefully with future interest rate cuts.”
The bank’s governing board insists on maintaining a restrictive financial posture but notes that upcoming cuts may be reassessed based on consumer price movements.
Last month, central bank governor Victoria Rodriguez mentioned in an interview that potential economic setbacks would factor into adjusting monetary policy.
Though Latin America’s second-largest economy narrowly avoided a technical recession in the first quarter, it faces considerable risks due to uncertainties surrounding US trade policies and lackluster domestic activity.
