The cost of debt service will drop to half a point of GDP with the rate cut cycle: CIDE

The cycle of lowering the reference interest rate of the Bank of Mexico will have a beneficial impact on public debt next year and also in 2026, since it will be less expensive, highlighted Raúl Feliz, an academic at the Center for Economic Research and Teaching ( CIDE).

It is not a single loss that will be beneficial, it is the entire cycle. If rates decline, as is likely, to 8 percent or less next year, there will be significant relief because a portion of the public debt is still at reviewable rates.he commented.

This could reduce debt service by perhaps half a point of gross domestic product (GDP) by the end of 2024 and is a relief that the new government will have in its effort to consolidate public finances, that is, return to smaller deficitshe declared.

Even within a two-year horizon, the government could save up to approximately one point of GDP by reducing rates.

The governing board of the Bank of Mexico (BdeM) reduced its reference rate by a quarter of a percentage point last Thursday to place it at 10.5 percent, its second consecutive cut and the third so far in 2024.

The result of a variation of one percentage point of the nominal interest rate on the financial cost of the public sector, which includes traditional debt and the real component of the debt of the Institute for the Protection of Bank Savings, is 30 billion pesos, according to the document relating to compliance with the provisions contained in article 42, section I of the Federal Budget and Fiscal Responsibility Law and the 2025 pre-criteria of the Ministry of Finance and Public Credit (SHCP).

Feliz explained that before the BdeM will begin the cycle of increasing its reference rate, debt service represented 2.5 percent of GDP, currently it is 3.5 percent and if rates returned to a level of between 6 and 6.5 percent, the cost on public finances would reduce one point of GDP, because lower interest would be paid on the debt.

The period of increase in rates was part of the mechanism carried out by the BdeM to control inflation, which became one of the factors that increased the public deficit, to 5.9 percent of GDP in 2024. Claudia’s administration Sheinbaum seeks to reduce it next year to 3 or 3.5 percent of GDP, but the rating agency Moody’s believes that it will only be able to lower it to 4.5 percent.

The firm noted that the government spent about 10 percent of its income on debt interest payments and last year it consumed 15 percent, however, rates will begin to fall because the United States Federal Reserve is going to decrease considerably more the rate, which will give BdeM room to continue with that trend.

The Mexican central bank maintained in its monetary policy statement that although the inflation outlook still warrants a restrictive stance, the evolution implies reducing the degree of monetary tightening.