December 27, 2024
Mexico’s central bank board may discuss a rate cut of either 25 or 50 basis points in its next decision in February, Deputy Governor Jonathan Heath told Reuters. However, he warned of growing uncertainty regarding U.S. trade.
Heath emphasized that the final decision would depend on the conditions at the time of the meeting. The monetary authority has been cutting rates by 25 basis points since starting an easing cycle earlier this year, but last week indicated it was open to larger cuts as inflation continues to slow.
Heath cautioned that the possibility of tariffs on U.S. imports from Mexico has added uncertainty. In November, President-elect Donald Trump promised to apply a blanket 25% tariff on goods from Mexico if more action is not taken to curb the flow of drugs and migrants into the United States.
“If Trump doesn’t announce a major disruption in his inauguration speech on Jan. 20, if inflation is in line with projections, and as long as there’s no unanticipated shock, the discussion prior to the February decision could be between cutting the benchmark rate by 25 to 50 basis points,” Heath said in a written response to questions on Monday.
The 70-year-old economist added that the decision would also depend on other factors such as the economic outlook, ratings agencies’ perspectives, and more information on services inflation, which has been sticky. “Even if the discussion takes place, the larger adjustment is not a given,” Heath said.
Heath stated that anything larger than a 50-basis-point cut from the current 10% rate would be “completely out of the question.” He also noted that the decision from the board may not be unanimous, as other board members differ on the speed and size of rate cuts needed to bring inflation back within target.
With the current information, Heath said it is “reasonable” for the benchmark rate to end 2025 between 8% and 8.5%, but he warned that a number of factors could influence this. Analysts polled by the central bank expect the Mexican economy to grow just 1.12% next year, down from around 1.6% this year. They see headline inflation closing 2025 at 3.8%, slowing from 4.37% at the end of 2024.
Heath attributed the expected slowdown to cautiousness from the private sector in the face of an uncertain and high-risk environment, as well as a tight fiscal policy with little room for maneuver as the government works to rein in the deficit. “However, as long as the sluggishness persists, the more likely it is that we’ll reach our inflation target in the estimated time frame,” he said. “That will lead us to continue lowering the rate until we reach a neutral stance.”
In 2026, if Mexico is not hit with any negative shocks, inflation should come within 3%, the monetary stance should be neutral, and the economy will be in full-throttle expansion, Heath said.
Source: (Reuters)
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