Banxico Cuts Interest Rates Amid Internal Disagreement and Inflation Forecasts
The central bank lowered rates to 6.25% while signaling a prolonged pause ahead.
1Divided Monetary Policy Decision
The Bank of Mexico's governing board voted 3-2 to reduce the reference rate by 25 basis points to 6.25%. Governor Victoria Rodríguez Ceja, along with Gabriel Cuadra and Omar Mejía, supported the cut. Conversely, Galia Borja and Jonathan Heath dissented, marking the third split vote of the year.
2Market Consensus and Surprises
Most analysts were caught off guard, as 20 of 36 participants in a Citi survey expected no change. Only six institutions, including Barclays and UBS, correctly anticipated the move. These forecasters analyzed previous meeting minutes as a vote count rather than a general sentiment, identifying the board's clear inclination.
3Contradictory Economic Signals
Critics highlight a paradox: Banxico cut rates while simultaneously raising its fourth-quarter inflation forecast from 3.5% to 3.7%. The bank maintained a risk balance skewed to the upside and acknowledged that long-term inflation expectations remain above target. Analysts warn that this confidence in disinflation may exceed what current data suggests.
4Internal Defense of Policy
Governor Rodríguez Ceja argues that the inflation uptick was anticipated and driven by non-core components. She notes that core inflation has been declining since February, with improvements in services. Furthermore, she emphasizes that the economic slack reduces exchange rate pass-through, justifying the rate cut despite the volatile macroeconomic environment.
5Future Rate Path Projections
Barclays economists interpret the bank's 'prolonged time' guidance as a temporary pause rather than a final stop. They project a final 25 basis point cut in March 2027, aiming for a 6% terminal rate. This aligns with the government's 2027 economic criteria, which also anticipates a year-end rate of 6%.
6External Factors and Constraints
The board must navigate the Federal Reserve's policy cycle, which remains a key variable. Barclays suggests that Banxico will likely avoid cuts in December or January if the Fed raises rates, preferring to wait until March. This allows the board to assess annual price adjustments and minimum wage impacts.
7Exchange Rate and Fiscal Impact
While the rate cut impacts short-term debt like CETES, analysts suggest the exchange rate is a more significant fiscal lever. A higher exchange rate can boost oil revenues and tariff income. Experts clarify that the central bank's primary goal remains inflation control rather than providing direct fiscal support to the Treasury.
8Monitoring Upcoming Data Points
The effectiveness of this policy shift will be tested by upcoming data, including October's full inflation report from INEGI. Market participants are also looking toward the November 19 release of the meeting minutes and the Federal Reserve's December decision. These events will clarify if the current rate path remains sustainable.