Cuts to the reference rate should be suspended: experts

The rise in prices and the prolongation of the war conflict in the Middle East should lead the Bank of Mexico (BdeM) to pause this Thursday the cycle of cuts to the reference rate – the instrument that sets the cost at which companies and families are financed –, financial sector analysts stated.

Although experts do not rule out that the central bank will reduce the interest rate, they consider that adjustments should be made once the pressures on both inflation and the global economy give a respite.

This Thursday the BdeM governing board has its monetary policy meeting, in which it will decide whether to reduce the reference rate. Before it was announced –at the beginning of this week– that inflation reached 4.64 percent annually in the first half of March, specialists considered a new cut appropriate.

After the data, the situation changed, as is the case of Banamex, a financial firm that projected a cut of a quarter of a percentage point this Thursday and now points to the opposite:

“The Bank of Mexico is obliged to act prudently. The majority of its board members had expressed in recent communications a certain urgency to continue with the cuts despite the upward pressures derived from taxes and tariffs that are already beginning to translate into increases in non-food merchandise, and accumulated increases in labor costs.

“In general, they have not expressed great concern about the global effects of energy prices on inflation in Mexico, nor about the rebound in agricultural prices in previous fortnights. However, we consider that, given the inflation reading significantly above expectations, the central bank should take a prudent pause,” Banamex specialists noted in their economic report.

James Salazar, deputy director of financial analysis at Kapital, commented in an interview: “With the recent data, not only of general inflation, which has rebounded, but also of underlying inflation – which excludes volatile prices –, which has been above 4 percent for 20 consecutive fortnights, the central bank has perfect incentives to pause tomorrow’s meeting.

“In addition, there is the uncertainty of the war conflict and the implications that it could have on certain price pressures and contaminate the behavior of other prices and services.”

The BdeM reference rate directly impacts the cost of money in the economy. The rates of mortgage loans, for purchasing cars and consumer goods, as well as the returns received by those who save or invest, depend on it, so their movements are reflected in the pockets of households and companies.

BBVA supports another reduction

BBVA, the bank with the largest presence in the country, considered that the central institute should continue with the cycle of cuts, because although inflation has risen, this responds to temporary factors such as the rise in energy prices and some foods and not to excess demand in the economy.

In a report, he detailed that underlying inflation remains relatively stable and expectations have not been disordered, which opens room for the central bank to adjust the reference rate downwards. In addition, he added, the Mexican economy remains weak and grows below its potential, so maintaining high rates for longer could further slow down credit, consumption and investment.