S&P expects ‘consistent’ interest rate cuts in Mexico until closing 2024 at 7%

The rating agency Standard & Poor’s (S&P) Global Ratings considered this Monday that the Bank of Mexico (Banxico) began a new cycle of cautious and consistent cuts to the reference rate up to 7% at the end of the year.

“A new cycle of rate cuts has begun in Mexico, and S&P Global Ratings believes it will last at least until the end of this year”, he noted in a report.

The US rating agency opined that the Mexican central bank will reduce interest rates “cautiously but consistently”.

They expected these cuts to be at least 25 basis points in the remaining meetings of the Banxico Governing Board in the year.

According to the Mexican central bank’s calendar, the Governing Board has scheduled at least six announcements of monetary policy decisions until December 2024.

S&P Global Ratings also admitted that there is “a high degree of uncertainty about what the terminal interest rate of the cut cycle in Mexico will be”.

However, he stressed that his prognosis “is in line with what the market currently expects: a terminal rate of around 7%”.

“This is higher than the long-term average of around 5%, which is roughly the neutral nominal interest rate estimate.”he added in his comment.

In fact, he specified that the rating agency anticipates that the interest rate will remain above the levels prior to the covid-19 pandemic, even with better inflation levels.

Likewise, he hoped that a process will begin in which real interest rates will gradually move away from their current restrictive position and approach neutral territory.

S&P estimated that inflation will continue its downward trajectory towards the end of 2024 and projected a deceleration for Mexico’s gross domestic product (GDP) of 2.2%, “from a very strong 3.2% in 2023″.

Also, I forecast that the implicit interest rate of the United States will have a “significant influence” in the Banxico terminal rate.

“In general, the terminal rate is important because it is the anchor of long-term financing costs (a term premium differential is added to that rate)”he explained.

In this panorama, the rating agency anticipated that banks with operations in Mexico are well positioned for this expected cycle of rate cuts, since they have benefited from the high rates that have prevailed since June 2021, reaching their maximum of 11.25% and which was maintained for one year from March 2023.

“We believe that, if interest rates in Mexico follow the path we expect, the impact on the operating performance of Mexican banks will be manageable.”, he noted.

Although he foresaw greater challenges for medium and small banks in the Mexican banking ecosystem.

“To the extent that rate cuts result in lower funding costs, these rate cuts will help smaller entities (whose funding structures depend on wholesale sources) and could also provide oxygen to non-bank financial institutions.”, he contrasted.