Monetary pause in Mexico is positive for banking sector’s profitability, says Moody’s

The monetary pause announced by the Central Bank of Mexico (Banxico) will be positive for the profitability of the local banking sector, given that funding costs will be contained in an environment of high-interest rates for a prolonged period, Moody’s Investors Service considered yesterday, Tuesday.

In a special report, the agency recalled that last May 18, Banxico decided to maintain the key interest rate at 11.25 percent, thus putting an end to 15 consecutive increases in the cost of credit since June 2021.

The decision, the monetary entity noted, was supported by signs of declining inflation, although price behavior, Moody’s indicated, will likely require keeping rates high for a longer period.

“Easing inflationary trends would positively impact customers’ disposable income and improve their ability to service debt, supporting asset quality metrics going forward,” the agency explained.

According to the rating agency, institutions’ profitability will benefit from the revaluation of loans, as Mexican banks accelerated their origination by about 12 percent in late 2022 and early 2023.

Moody’s estimates that the full impact of loan repricing will be seen in the next six months.

The interest rate hike cycle in Latin America started earlier. It was even more aggressive than in other latitudes.

Still, inflation has already shown signs of stabilization in most countries, leading to a direction change in central bank policies.

Moody’s pointed out that Mexico became the fourth country in the region to maintain the cost of credit, after Brazil in August 2022, Chile in October last year, and Peru in February 2023.

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