Banxico’s Deputy Governor Mejia advocates for gradual cuts – MNI
Banxico’s Deputy Governor Omar Mejia Castelazo said that the central bank needs to reduce borrowing costs as higher rates could cause distortions in the markets and the economy, he said in an interview with Larissa Garcia of Market News International (MNI).
Mejia said that “it is necessary to adjust the level of restriction” and added the central bank would lower rates gradually as “the ongoing disinflationary process reduces the costs of restrictive monetary policy for the economy.”
Even though Banxico’s mandate is fixed on price stability, Mejia shows signs of concern for economic activity. He said the “risk of weak activity is already materializing. We've had three quarters with growth below projections. I had already seen this coming, which is why my vote was dissenting to lower interest rates in June.”
In the last monetary policy decision, Banxico reduced the main reference rates by 25 basis points (bps) on a 3-2 split vote decision. Governor Rodriguez and Deputy Governors Galia Borja and Omar Mejia favored a cut, contrary to Deputy Governors Irene Espinosa and Jonathan Heath.
Most bank analysts estimate Banxico will lower interest rates by at least 50 basis points (bps) for the remainder of 2024.
When asked about the upcoming September meeting, he commented the bank is considering several factors, while acknowledging that services inflation remains stickier than expected. Mehia added that “Some components in services inflation have shown higher persistence due to the lagged effects of pandemic-related shocks.”
Banxico FAQs
The Bank of Mexico, also known as Banxico, is the country’s central bank. Its mission is to preserve the value of Mexico’s currency, the Mexican Peso (MXN), and to set the monetary policy. To this end, its main objective is to maintain low and stable inflation within target levels – at or close to its target of 3%, the midpoint in a tolerance band of between 2% and 4%.
The main tool of the Banxico to guide monetary policy is by setting interest rates. When inflation is above target, the bank will attempt to tame it by raising rates, making it more expensive for households and businesses to borrow money and thus cooling the economy. Higher interest rates are generally positive for the Mexican Peso (MXN) as they lead to higher yields, making the country a more attractive place for investors. On the contrary, lower interest rates tend to weaken MXN. The rate differential with the USD, or how the Banxico is expected to set interest rates compared with the US Federal Reserve (Fed), is a key factor.
Banxico meets eight times a year, and its monetary policy is greatly influenced by decisions of the US Federal Reserve (Fed). Therefore, the central bank’s decision-making committee usually gathers a week after the Fed. In doing so, Banxico reacts and sometimes anticipates monetary policy measures set by the Federal Reserve. For example, after the Covid-19 pandemic, before the Fed raised rates, Banxico did it first in an attempt to diminish the chances of a substantial depreciation of the Mexican Peso (MXN) and to prevent capital outflows that could destabilize the country.
Author
Christian Borjon Valencia
FXStreet
Christian Borjon began his career as a retail trader in 2010, mainly focused on technical analysis and strategies around it. He started as a swing trader, as he used to work in another industry unrelated to the financial markets.
