Caution Persists at Banxico Amid Inflation Spike, Despite Outlook for Another Interest Rate Cut
Jonathan Heath, Deputy Governor of the Bank of Mexico (Banxico), predicted that most members of the Governing Board will vote in favor of another 50 basis point cut to the interest rate at the upcoming meeting at the end of June. However, Heath expressed reservations about maintaining this pace of reductions, given the context of rising inflation and economic uncertainty.
Headline inflation in Mexico rose to 4.42% year-over-year in May—its highest level since November—exceeding the central bank’s target range of 3% +/- one percentage point. In the same month, core inflation—which is considered a better gauge of price trends by excluding volatile items—stood at 4.06%, its highest level in nearly a year. These figures have triggered warning signs about the inflationary risks the Mexican economy faces.
Since mid-May, Banxico had signaled in its forward guidance the possibility of adjusting the benchmark rate by 50 basis points, an intention that appears likely to be confirmed in the upcoming decision, scheduled for June 26. Currently, the rate stands at 8.5% after three consecutive cuts, and the bank has reiterated that future adjustments will depend on the evolution of inflation and other key indicators.
Despite this trajectory, Heath told Reuters he believes it would be prudent to pause rate cuts—or at least reduce their magnitude—in order to more accurately assess the evolution of inflation and confirm a clear downward trend. The deputy governor emphasized that the balance of risks for inflation remains tilted to the upside, which calls for a more cautious stance before continuing with an expansionary monetary policy.
In its most recent report, Banxico revised down its 2025 Gross Domestic Product (GDP) growth forecast, cutting it to 0.1% from a previous estimate of 0.6%, in line with a slowdown in domestic economic activity. Despite this, the central bank projects that headline inflation will drop to 3.3% by the end of 2024 and core inflation to 3.4%, approaching the official 3% target in the third quarter of 2026. However, Heath warned that these projections could come under pressure if upward price trends persist.
Financial markets widely anticipate another half-point rate cut on June 26, but remain alert to nuances in central bankers’ communications regarding the inflation outlook. Recent volatility in financial markets—driven by both domestic and external factors—as well as the political transition following federal elections, add another layer of uncertainty to decision-making.
In summary, while Banxico appears likely to continue its cycle of rate cuts with another adjustment this month, the view of some members like Jonathan Heath suggests that caution may be necessary in light of inflationary pressures and a weak economic recovery. The evolution of upcoming data will be crucial for shaping monetary policy strategy for the rest of the year and the start of 2025, in a context of both domestic and external challenges for the Mexican economy.
