Banxico: credibility at risk?

The dissent on the board of governors of the Bank of Mexico raises a question for public analysis and discussion: Is the 50 basis point reduction in the benchmark interest rate, despite persistently rising inflation and its distance from the central bank's own target, undermining the institution's credibility?

This is an approach that has already been observed among private analysts, albeit in a minority.

The worrying thing is that it has now been exposed within the Governing Board, which includes: Victoria Rodríguez Ceja, governor; and the deputy governors: Jonathan Heath, Galia Borja Gómez, Omar Mejía, and José Gabriel Cuadra.

Let's look at some background data.

In the current rate cut cycle, Banxico has reduced its benchmark interest rate by 50 basis points on four consecutive occasions.

They accumulate a reduction of 200 basis points, from the 10% interest rate that was set in December 2024.

The last time it was cut by 50 basis points was last June, when it stood at 8%.

The 50 basis point interest rate cut came as headline inflation stood at 4.32% in June, above Banxico's target range of 3% plus or minus 1%.

The Bank of Mexico (Banxico) published minutes number 117 this Thursday, July 10, corresponding to last month's meeting in which, by majority vote of its Board of Governors, the overnight interbank interest rate was reduced by 50 basis points.

On that occasion, the decision was not unanimous. Deputy Governor Jonathan Heath voted to keep the rate at 8.5%.

What is striking in the minutes are the arguments of the dissident deputy governor.

He warned that it is "unrealistic" to assume that inflation will decline due to economic weakness that "has not materialized."

His phrasing was forceful: The most recent forecasts for activity – he noted – anticipate stagnation, but not a recession that would sufficiently weaken aggregate demand.

He also noted that it is necessary to act prudently and pause reductions in the reference rate.

Heath noted that the inflationary trajectory, far from improving, continues to deteriorate.

His argument was more extensive.

He said the 50 basis point rate cut puts the company at risk of maintaining a sufficiently restrictive stance.

This decision, he said, sends a message of complacency, undermining the commitment to the inflation target and undermining Banxico's credibility, especially when the inflation forecast is not being met.

He said it is imperative to send a consistent message of firmness.

However, the majority of the Governing Board members considered the 50 basis point cut feasible.

The minutes state that the Governing Board plans to continue "calibrating the monetary stance," but do not detail the extent of the upcoming cuts.

For now, everything seems to indicate that the end of the Bank of Mexico's 50 basis point cuts may have arrived.

The central bank's decisions are very delicate because its credibility is at stake. We'll see.

Glimpses

US President Donald Trump has decided to impose a 35% tariff on all Canadian exports.

The US president wants Canadian companies to move their factories or production to the United States.

The situation is anticlimactic for the Mexican negotiating team, led by Economy Secretary Marcelo Ebrard, who traveled to Washington to negotiate the copper tariff previously announced by the U.S. president.

The tax is 50% for all copper imported into the United States.

The United States' trade relations with all of its trading partners have become more complicated, including its two largest trading partners: Mexico and Canada.

*** Coparmex's accusation against Pemex regarding the debts it owes its suppliers is overwhelming.

He points out that the accumulated liabilities currently stifling hundreds of companies are due to poor practices, cost overruns, and opaque contracts inherited from previous administrations.

The debt stands at 404 billion pesos, and although it has been reduced by 20%, it remains unsustainable.

Coparmex maintains that Mexico needs a solid oil company, but not at the cost of weakening the business ecosystem that has historically supported its operations.

Pemex cannot move forward if it drags down the companies that have provided technical, logistical, and operational support for decades, warns the employers' organization.

So clear, so strong.