Banxico Hints at Interest Rate Cut in 2024

A change in wording by Mexico’s Central Bank (Banxico) is leading analysts to forecast a potential reduction of the high-interest rate in 2024. 

Following the decision by Banxico to maintain the Interbank Interest Rate at 11.25%, analysts observed a shift in language within the board’s report. The phrase "prolonged time," indicating an expectation to sustain current rate levels, was replaced by "some time.” This alteration implies a likely decrease in interest rates in the first half of the upcoming year, argues Enrique Quintana, Columnist, El Financiero. 

Banxico’s next meeting to determine monetary policy on Dec. 14 is not expected to see rate changes, Victoria Rodríguez Ceja, Governor, Banxico, tells El Financiero. However, if inflation continues to shrink, a review may be considered, possibly in the initial meeting of the following year. Analysts do not anticipate a significant shift in the downward trajectory of inflation. They highlight the lag in the transfer of cost increases to prices in the service sector as a more pertinent risk factor. 

Banxico’s board evaluated inflationary shocks, changing expectations, and the price formation process. Despite acknowledging a disinflationary process in the country, both general and underlying inflation remained high, reaching 4.26% and 5.50% in October, respectively. The non-core component stayed notably low, standing at 0.56% in that month. 

The board’s unanimous decision to maintain the target for the Interbank Interest Rate at 11.25% is aligned with the predictions of 28 economists surveyed by Bloomberg. Despite inflation peaking in 3Q22, Banxico’s five-member board, which had raised interest rates by a total of 7.25% over 22 months, has kept borrowing costs steady since March. 

In early November, rating agency Moody's adjusted its growth forecasts for Mexico's economy, citing positive surprises in productive sectors and forecasting expansion caused by nearshoring. Projections now indicate a 3.5% growth in Mexico's GDP for the current year, up from the previous estimate of 3.3%. Looking ahead to 2024, the forecasted growth stands at 2.3%, an increase from the initial estimate of 1.9%.

In its press release, Banxico expressed a commitment to keep monitoring inflationary pressures and other factors influencing the projected path of inflation, including geopolitical tensions and challenges to financial stability. 

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