Banxico not yet ready to end cycle of interest cuts in face of Trump tariff threats

A spike in inflation has become the new concern among analysts after US president-elect Donald Trump vowed to impose 25% tariffs on both Mexico and Canada, and an additional 10% on Chinese goods, once he assumes office in January.

Mexico's President Claudia Sheinbaum responded that any tariff will be met with similar counter-measures, which could derail the disinflationary process in the US that has allowed the Fed to reduce the base rate to 4.6% from a four-decade high of 5.3% before its September meeting.

Although Mexico's monetary authority (Banxico) could also face pressure to end the rate reduction cycle, central bank governor Victoria Rodríguez Ceja made it clear on Wednesday that she does not plan to change course for the moment.

Mexico's base rate is currently 10.25% and has seen four non-consecutive cuts since the record 11.25% level seen in March.

“In our assessment of the inflationary outlook, we see significant progress in the disinflation process and at the appropriate time we will be analyzing the impact of external events such as the case of the Federal Reserve as well as many other factors,” Rodríguez said during a press conference to present Banxico's July-September report.

Annualized inflation rebounded to 4.76% in October, after having fallen for two consecutive months. However, core inflation, which better reflects the trend, according to Banxico, continued to decline, reaching 3.80%.

The central bank's inflation target is 3% +/- 1 percentage point.

Rodríguez admitted that "there is uncertainty about the policies that will be implemented," referring to Trump's measures, but added that more certainty is needed about the actions that will be taken.

“It will be important to keep an eye on the policies that are actually decided to be implemented in this case. As we have more information about the new policies in the United States, we will evaluate the impact both in the short and medium term on economic activity, inflation and economic prospects,” said Rodríguez.

Asked whether he saw any clear signs at the Banxico conference that the process of cutting the key rate will slow down, James Salazar, deputy director of economic analysis at CI Banco, told BNamericas that it "was not very clear in the sense of thinking that there are some elements that could favor a slowdown, either in the Fed's monetary policy or in its inflation estimates, which in general terms continue to show a disinflationary process and convergence to its target goal."

However, Salazar said that, given the current tense environment due to Trump's statements, Banxico's deputy governors “were very careful,” similar to Fed chair Jerome Powell, who this month said that there is no rush to lower interest rates.

Banxico deputy governor Jonathan Heath, for example, said that “we have to be very cautious. I think there is room to start lowering the rate but still maintaining a restrictive monetary stance for a while, paying close attention to the data and the risks that will be forming, especially with the arrival of Trump. We are going to have to be very attentive to this.”

The governor "said it is too early to be able to evaluate the impacts. First, we have to wait to see what policy is actually implemented and, once we know for sure what is actually done, we can make a correct evaluation of the impact it could have on certain indicators such as inflation," said Salazar.

“Looking ahead is somewhat superfluous work when it comes to developing scenarios. That’s why it’s not necessarily impacting inflation expectations metrics yet, although it is obviously part of the risk balance for prices,” he said, adding that rates above 8% can still be considered restrictive.