(Bloomberg) -- Mexico reduced borrowing costs for a second straight meeting Thursday as inflation readings are easing faster than expected and the economy heads for a third year of slower growth.
Banxico, as the central bank is known, cut its key interest rate by a quarter-point to 10.5%, matching the estimate of 24 of 30 economists surveyed by Bloomberg. Five of the analysts thought that policymakers would lower the rate by 50 basis points, while one predicted they would hold.
The bank said that looking ahead, the board expects that the inflationary environment will allow further reference rate adjustments, highlighting the slowdown in headline inflation due to a partial reversal in the supply shocks that have affected the non-core component and core inflation has also continued decelerating.
“Although the outlook for inflation still calls for a restrictive monetary policy stance, its evolution implies that it is adequate to reduce the level of monetary restriction,” policymakers wrote in a statement accompanying their decision.
The forward guidance indicates that Banxico will continue to lower its key rate by a quarter-point per meeting in the coming months, said Benito Berber, chief Latin America economist at Natixis.
The five-member board led by Governor Victoria Rodriguez in early August had looked past a run-up in consumer prices to deliver a 25 basis-point cut. Since then, headline inflation has decelerated sharply while weakness in the industrial sector of the US, which is Mexico’s No.1 trade partner, has undercut the country’s exports and points to slowing growth ahead for Latin America’s second-biggest economy.
“The economic conditions warrant it, on the one hand, and inflation has already resumed a downward trend,” Jessica Roldan, the chief economist at Casa de Bolsa Finamex, said before the decision. “Upward price pressures are moderating. We’re in a phase of the economic cycle in which it make sense for the stance to not be so restrictive.”
The bank’s decision was split, with Deputy Governor Jonathan Heath as the lone member voting to keep the rate at 10.75%. “The fact that there was a dissenting vote to hold at 10.75%, and no dissenting vote for a larger 50bps is a somewhat hawkish signal,” said Alberto Ramos, chief Latin America economist at Goldman Sachs Group Inc..
Headline inflation slowed to 4.66% in the first two weeks of September, almost a full percentage point lower than the mid-July print, and the once-sticky core component has also decelerated, coming down to 3.95%. The bank targets inflation at 3%, plus or minus a percentage point.
Banxico slightly lowered its inflation forecast for the last quarter of 2024 to 4.3% from 4.4% previously. “Although the downward revisions to inflation forecasts were minor and concentrated in the short term, with inflation risks still skewed to the upside, the board implicitly acknowledged an improvement by recognizing more favorable core inflation dynamics,” said Pamela Diaz Loubet, Mexico economist at BNP Paribas.
As to Mexico’s economy, the data have been bumpy but the direction of travel appears clear, and the consensus call among analysts is that growth will decline for a third year in 2024 and likely yet again in 2025.
Banxico last month cut its 2024 GDP forecast to 1.5% from 2.4% just three months earlier, suggesting a loss of activity and demand that have helped sustain stubbornly high inflation readings. The bank said on Thursday that lower than expected economic activity remains as a downside risk for inflation.
Also likely bolstering the case for easing, the US Federal Reserve last week lowered its key rate for the first time in four years with a half-point reduction and left the door open to additional cuts. Banxico usually takes the actions of its US counterpart into account when setting policy.
Despite the Fed’s cut and Banxico’s greater confidence in the disinflation process, Mexican policymakers remain cautious, Berber said.
The peso strengthened after the decision and interest rate swaps rose since some investors had positioned for a 50 basis-point cut and moved to cut losses.
Gabriel Casillas, chief of Latin America economics at Barclays Plc, said that the “tone of this decision was more dovish not only because it had one less dissident versus the previous one,” but also because the forward guidance indicates “a higher level of confidence in future rate changes.”
President-elect Claudia Sheinbaum will take office Oct. 1, and many investors have lost confidence in the country’s Congress dominated by her Morena party after it pushed through legislation that would have judges, including those of the Supreme Court, elected by popular vote starting in 2025. The uncertainty about what more partisan judges could mean for Mexico’s business environment has led some economists to estimate there will be a sharp decline in foreign investment.
Lower borrowing costs could be a boon for Sheinbaum’s government as the Finance Ministry prepares its 2025 budget, for which it has pledged that it will bring the deficit down from this year’s rate of 5.9% to 3.5% or less.
“I think they have ample room to continue with an easing cycle as core inflation continues to fall, shocks to non-core are dissipating, and the economy is sharply decelerating,” said Carlos Serrano, chief economist at BBVA Mexico.
--With assistance from Rafael Gayol, Michael O'Boyle and Dale Quinn.
