Anticipated reduction in inflation may prompt additional interest rate reductions, according to expert forecasts.
Mexico's Central Bank Expected to Lower Interest Rate by 25 basis Points
According to financial institutions Monex and Scotiabank, Banxico is expected to lower its benchmark interest rate by 25 basis points to 7.75% at its August 7 meeting. This decision aligns with the broader market consensus driven by lower inflation and a weak economic outlook, which supports the continuation of Banxico’s easing cycle.
Both Monex and Scotiabank anticipate this modest easing step as part of a more cautious gradual rate reduction cycle, ultimately targeting a terminal rate around 7.5% by the end of 2025. Monex foresees two 25-bp cuts in August and September, leading to a 7.5% terminal rate in 2025. Scotiabank expects a 25-bp cut in August and maintains a forecast for the terminal rate in 2025 around 7.5%.
Inflation data showing easing pressures reinforce expectations for this measured approach. Inflation declined in the first half of July, marked by lower costs for various agricultural products such as lemons and avocados. However, the core price index, excluding volatile items like food and energy prices, climbed 0.15% in early July, compared with 0.22% a month earlier.
The non-core rate declined from 3.43% to 1.24%, fueled by a sharp decline in fruit and vegetable prices (down 12.24%). This abrupt drop in fruit and vegetable prices offset a 10.70% increase in livestock products. Consumer prices rose 0.15% compared to the previous two weeks, also below expectations of a 0.27% increase.
Among the products with the highest price increases during the first two weeks of July were nopales, air transport, lettuce, and cabbage. Despite these increases, the overall inflation rate continues to slow, with annualized inflation slowing from 4.13% to 3.55% in the first half of July, below the market consensus of 3.61%.
President Claudia Sheinbaum celebrated the news, saying the slowdown in inflation indicates that Banxico has room to keep cutting interest rates. Banxico, in its statement from the June 27 meeting, expects to slow the pace of interest rate cuts. The policy rate is the lowest since August 2022, having been reduced by 50 basis points in June, reducing the policy rate in Latin America's second-largest economy to 8.0%.
In a statement, Monex said the data surprised the market as inflation reached its lowest level during the first fortnight of July in a decade. The brokerage expects the central bank to vote for a 25 basis point rate cut at its Aug. 7 meeting, lowering the benchmark interest rate to 7.75%. As the economic situation continues to evolve, it will be interesting to see how Banxico navigates its interest rate decisions in the coming months.
- The decision by Banxico to lower its benchmark interest rate by 25 basis points is aligning with the broader market consensus, driven by lower inflation and a weak economic outlook.
- Both Monex and Scotiabank anticipate a more cautious gradual rate reduction cycle, with a target terminal rate around 7.5% by the end of 2025.
- Inflation data show easing pressures, reinforcing expectations for a measured approach in interest rate cuts, as seen by the lower costs for various food products such as lemons and avocados.
- The announcement of the lowered interest rate by Banxico, coupled with the slowing inflation rate, has sparked discussions about the future of business, energy, and finance in Mexico, particularly in relation to the transport and food sectors.
