Inflation in Mexico has again exceeded the central bank's target range, reaching 4.63% in the first half of March. This level leaves room for rate cuts, as despite the recent uptick, inflation had remained within the target range in previous months, implying the real rate continues to be restrictive. For now, the communication from Banxico aligns with the expectation at the presidential palace. Additionally, the risk of inflationary impacts from the Iran war persists, adding to other local fiscal pressures, such as tariffs on Asian countries. Amid this shift in the environment, Banxico has not given signals of abandoning the possibility of further adjustments, which contrasts with a market that now anticipates greater caution. On the other hand, the consensus among specialists and bank executives consulted by LPO leans towards a more cautious stance, with expectations that the pause in the rate-cutting cycle will prolong after weeks in which another 25-basis-point cut was priced in. However, the financial consensus is not total. The message suggests that the fight against inflation is not a current priority for the government, unlike the push for banks to increase lending to attract investment, activate supply chains, and reverse the economic stagnation. The latest data from INEGI reinforces concerns about the economic direction: according to its timely estimate, monthly activity in January fell by 0.9%. But Sheinbaum's call to the Mexican banking sector faces a problem: the high cost of money, with a current reference rate of 7%. "In any case, at the next review, we can avoid a cut," officials at the Ministry of Finance explain. This is as Claudia Sheinbaum affirmed at the 89th Banking Convention in Cancún that "inflation is contained." In the run-up to this Thursday's announcement, Banxico faces an internal tension: while the presidential palace pushes for a new interest rate cut, the market expects no change from the current 7%. Within the economic team, the prevailing view is that to generate growth and greater economic expansion, it is necessary to continue reducing the cost of money. In its February forward guidance, it left the door open for a new cut in March, and days later, some of its officials fueled that signal. However, within days, the outlook complicated: this Tuesday it was learned that in the first half of March, inflation surpassed Banxico's tolerated range—between 2% and 4%—by standing at 4.6%. In the middle of this, inflation once again puts the credibility of the monetary authority at play. "Some members were inclined to cut, the governor mainly," a source told LPO. In the same vein, Paulina Anciola, Deputy Director of Economic Studies at Banamex, added: "Comments from various members in interviews after the start of the geopolitical conflict also seem to be in line with continuing to cut the rate." This division in the market is another argument for the Mexican government to consider that the central bank still has room for cuts without generating a negative impact on the financial market. The war in Iran complicates new rate cuts: The Fed extends its monetary pause. Analysts agree that a cut would not be a total surprise. "It would occur in a context where the differential has been narrowing, but where the peso has been relatively well-supported by an attractive carry trade and, above all, by the structural weakness of the dollar globally," explained a chief economist at one of Mexico's largest pension funds. In that scenario, Banxico's decision becomes more complex, between advancing with the cut pushed by Claudia Sheinbaum's government or aligning with a market that is already turning towards caution. For example, large participants like Barclays and J.P. Morgan maintain their projection of a 25-basis-point downward move in the interest rate. Marco Oviedo, from the Brazilian brokerage XP, agrees with the projection: "The Board has not changed the signals in this regard."
