Banxico’s Deputy Governor Mejia advocates for gradual cuts

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

What is the Bank of Mexico?

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%.

How does the Bank of Mexico’s monetary policy influence the Mexican Peso?

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.

How often does the Bank of Mexico meet during the year?

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.

Share: Feed news

Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers. The author will not be held responsible for information that is found at the end of links posted on this page.

If not otherwise explicitly mentioned in the body of the article, at the time of writing, the author has no position in any stock mentioned in this article and no business relationship with any company mentioned. The author has not received compensation for writing this article, other than from FXStreet.

FXStreet and the author do not provide personalized recommendations. The author makes no representations as to the accuracy, completeness, or suitability of this information. FXStreet and the author will not be liable for any errors, omissions or any losses, injuries or damages arising from this information and its display or use. Errors and omissions excepted.

The author and FXStreet are not registered investment advisors and nothing in this article is intended to be investment advice.