While the market consensus anticipates that the Bank of Mexico (Banxico) will reduce interest rates in the coming months—a view shared by Bank of America (BofA)—the path remains uncertain.
Mexico’s headline inflation is still close to 5%, the labor market is tight, the peso has weakened, and inflation expectations remain above 3%. These factors, along with others, lead BofA to believe that the road to lower rates is not without risks.
“The direction is clear. The reasons for Banxico to cut rates are evident: core inflation is below 4%, the economy is weak, and the Federal Reserve has already started cutting rates. But there are risks, and the path is uncertain,” the institution stated in a report to its clients.
One risk, for example, is that Banxico may cut rates too quickly.
BofA anticipates that at the next meeting on September 26, Banxico will reduce its benchmark rate by 25 basis points, bringing it to 10.50%, with a decision that could be unanimous (5-0 in the votes of the board members) or possibly a 4-1 vote split.
The U.S. bank also expects Banxico to cut rates gradually but steadily for the rest of this year and into early next year, potentially accelerating the pace once there is more evidence of weaker growth.
“We expect the policy rate to be 10.00% by the end of 2024 and 8.25% by the end of 2025. However, we need to monitor Banxico’s pace of rate cuts closely, among other factors,” noted BofA experts.
BofA also warns of the risk that Banxico could cut rates by 50 basis points this week, bringing the policy rate to 10.25%, in response to the U.S. Federal Reserve, despite inflation still hovering around 5.0%.
Unanimous Consensus for Rate Cut
The Citibanamex survey, which has a long history and widely reflects the sentiment of Mexico’s analyst community, unanimously points to a rate cut by Banxico in the coming days.
The consensus expects a 25-basis-point cut to the interest rate, with most participants (28 out of 36) anticipating this move. However, six participants forecast a 50-basis-point cut in September, and two predict the next change will be a 25-basis-point cut, but not until November.
The median estimate for the interest rate at the end of 2024 has dropped from the previous survey to 10.00% from 10.25%, with a range of 9.50% to 10.50%. For the end of 2025, the median expectation also fell by 25 basis points, to 8.00% from 8.25%, with a wide range of 7.00% to 10.00%.
For the entire month of September, analysts estimate that headline inflation will be 4.7% annually. The consensus predicts a monthly inflation rate of 0.18% or an annual rate of 4.72%, lower than the 4.99% annual rate recorded in August.
Inflation expectations remained relatively stable. The median projection for headline inflation at the end of 2024 stood at 4.55%, slightly lower than the previous survey’s 4.60%, while the core inflation forecast remained at 3.90% annually.
In the Citibanamex survey, exchange rate estimates for 2024 have adjusted slightly upwards. The median projection for the exchange rate at the end of this year was revised to 19.57 pesos per dollar, from 19.50 pesos per dollar in the previous survey. For the end of 2025, the consensus estimate remained unchanged at 19.85 pesos per dollar.
