While Banxico recognized progress against inflation, it still sees challenges
Multinationals should prepare for high interest rates throughout Q1, 2023, as Banxico maintained the rate at 11.25% in December 2023, and is unlikely to cut it during its next meeting in February 2024. However, monetary easing appears to be in sight, as the US Federal Reserve may make up to three quarter-point reductions to its benchmark rate throughout 2024, and core inflation in Mexico appears to be responding to a tight monetary policy—despite the November increase of headline inflation. As rate differentials between Mexican and US rates could approach historic levels in 2024, companies should expect a gradual weakening of the MXN against the USD. We are forecasting an average exchange rate of 18.4 MXN per USD in 2024.
Overview
On December 14, Banxico left its interest rate at 11.25%, keeping it unchanged since late March 2023, when it increased by 25 points from 11%. While the Board of Governors recognized progress in decelerating inflation, it also recognized challenges. Both headline and core inflation remain above Banxico’s upper target of 4% and the main target of 3%. Mexico’s CPI grew from 4.25% in October to 4.32% in November, and core inflation decreased from 5.5% to 5.3% in November. Banxico declared that it would be necessary to maintain interest rates at their current level for “some time.”
Moreover, the US Federal Reserve announced today that it will keep its interest rate at 5.5%—the same since July 2023—after a slight decline in CPI from 3.2% to 3.1% in November. After the US Federal Reserve’s decision, the MXN strengthened.
Our View
Banxico is likely to start cutting interest rates until its meeting in late March 2024 as a response to resilient domestic economic growth and inflation, a gradual disinflationary process at the global level, and a cautious monetary policy in developed markets, particularly the US. Banxico has been consistent with the Federal Reserve’s policy in 2023, and it is likely to follow its cautious approach in the coming months. Rate differentials between Banxico and US Federal Funds have remained at historically high levels, strengthening the MXN. We also expect Mexico’s CPI to close 2024 at 3.9%, within Banxico’s upper target; however, this may only occur in H2. Our forecast for consumer spending is a real YOY growth of 2.4%, while we forecast gross domestic investment to grow at a real rate of 2.5% YOY.
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