Long-term interest rates usually reflect the real interest rate, country risk, and inflation expectations. Some analysts suggest that markets might be anticipating lower inflation in the future and are uncertain about long-term fiscal adjustments. Despite these considerations, the Board of Governors has the final say in its decisions, which have been previously signaled by its members.
The discussion regarding the possibility of accelerating interest rate cuts focuses on the historically high levels of both nominal and real rates, which have remained thus for 41 months. Economic slowdown is evident and indicators point to a potential exacerbation of this downward trend. However, inflationary pressures are expected to decrease, which may accelerate convergence towards the Bank of Mexico's target.
In the first monetary policy meeting of the year, the Bank of Mexico decided to implement a 50 basis point cut, despite the significantly changed tone of markets and context. There is uncertainty about the trajectory of inflation in the coming months, especially considering the risks present in the current scenario.
One of the most notable concerns is the prudence with which the commitment to the inflation target is being addressed, both by the members of the Board of Governors and the market in general. Although some were still undecided, rates had already incorporated the 50 basis point cut into the reference rate.
The meeting statement indicated future cuts of the same magnitude, particularly in the next meeting in March, suggesting that monetary conditions should be less restrictive given the current circumstances of inflation.
The depreciation of the currency in recent months could affect the underlying component and goods, making disinflation in the future more difficult, which reinforces the need for prudent monetary policy conduct. Despite certain advances in overall and underlying inflation, which remain in line with the average of the last 25 years, inflation at the upper range of the interval could indicate some complacency, without considering current risks.
Additionally, long-term interest rates remain at the high end of the range observed in recent years, representing an additional challenge. The latest available GDP data for the last quarter of 2024 showed negative growth, largely affected by primary activities.
