BNP Paribas considers that the current level of the reference interest rate in Mexico (10.50%) is not consistent with inflation (4.58% annually in September), so there is room for the central bank to continue reducing interest rates. interest both in the remainder of 2024 and in 2025.
“There is room to cut the reference interest rate, given the progress that the disinflationary process has shown in Mexico. I think there is no room to have an expansive monetary policy, that is without a doubt; However, inflation is at a level that is not compatible with the level of rates we currently have,” said the Chief Economist of the financial group, Pamela Díaz Loubet.
In an interview with Forbes Mexico, he estimates that in the remainder of the year there will be two more interest rate cuts, of 25 basis points each, to close at 10%. For 2025, the expectation is for a decrease of 200 basis points, ending the year at 8% because the projections for general inflation at the end of each year point to levels of 4.3% and 3.7%, respectively.
The economist specified that Banxico must continue to be cautious and the behavior that services inflation continues to show is not consistent with cuts of 50 basis points, but there is room to reduce the rate, as long as a fairly prudent monetary policy is maintained.
He explained that the result of September inflation was a reading that was well below its seasonal behavior, because in previous months several shocks occurred that affected non-core inflation in the agricultural component and now a fading of this.
Furthermore, in the underlying component (which includes prices of more volatile goods and services, such as agriculture and energy, and which allows us to have a better perspective of the trajectory of inflation in the medium term) very significant advances are also seen, especially in the goods component and, particularly, food merchandise.
Pamela Díaz elaborated on the fact that September is usually a month in which tuition fees increase, but it is seen that the increase is very similar to what was registered before the post-pandemic shocks.
However, he warned that these elements will not necessarily be present for subsequent inflation readings and the space for them to be reduced is more limited, in addition to the fact that there will potentially be new shocks, such as droughts and stronger winters that will impact the prices of agricultural products.
The analyst also highlighted that it is important to note that the space for core inflation to continue falling is quite limited, and to continue seeing significant progress, there should be a break in the persistence of services that has not yet been observed.
Risks
The economist pointed out that these scenarios are subject to risks and some factors that could lead to fewer interest rate cuts are related to the elections in the United States, derived from the actions that the Federal Reserve may have due to this; That is, if the result of the elections causes the central bank of that country to pause its cycle of cuts, Banxico could cut less than 200 basis points in 2025.
In contrast, a scenario of greater cuts in the interest rate is related to the possibility of a recession in the United States, or an economic slowdown much more pronounced than what is already anticipated, since that would affect the Mexican economy. and it would make Banxico have a more reactive stance.
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