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Interest rates stable throughout 2019 in Mexico

February 8, 2019

We now expect the central bank to keep the policy rate unchanged throughout this year

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Our LatAm Macro Monthly report will hit your mailboxes today, featuring scenarios for Brazil, Mexico, Argentina, Chile, Colombia, Peru, the global economy and commodities.


Banco de Mexico (Banxico) board members voted unanimously to leave the policy rate unchanged at 8.25%, in line with our expectations and market analysts. In the statement, the central bank indicates that the bar for additional rate hikes is higher now, but an easing cycle is unlikely anytime soon as the central bank remains cautious. 

The statement suggests additional hikes are unlikely. In the press release announcing the decision, the central bank mentions that the level of policy rate is consistent with meeting the target in the relevant policy horizon.

Still, the central bank remains cautious, so an easing cycle is also unlikely anytime soon. The balance of risks for inflation is still tilted to the upside, according to the statement, and the board continues to be worried about the stickiness in core inflation (so the board didn’t take comfort with the most recent CPI releases, which surprised markets to the downside). 

We now expect the central bank to keep the policy rate unchanged throughout this year. Previously we were expecting one additional 25-bp interest rate hike. Still, considering the high level of uncertainty over domestic policy direction and over the approval of the USMCA in the U.S. congress, we continue to think that rate hikes this year are more likely than cuts.
**Full story here.

January’s CPI inflation came in below market expectations. The index registered a 0.09% mom increase (compared to the 5yr median of 0.53%), below our forecast (0.21%) and market expectations (0.18%). 

We expect inflation to reach 3.8% for the end of this year. The most recent figure reflects lower VAT in the northern frontier, which is one-off. Looking forward, lower oil prices should exert less pressure on the non-core component. However, upside risks to inflation remain due to remaining uncertainties over the approval in the U.S. congress of the renegotiated NAFTA and the uncertainty over domestic policy direction, at a time that the economy is operating with no slack.
**Full story here.

Macro Scenario: AMLO is now facing his first difficulties. These are related to gasoline shortages (due to a strategy to fight fuel theft), strikes in manufacturing firms and railways blockades, which will likely disrupt economic activity in the beginning of the year. The Ministry of Finance’s (MoF) measures to strengthen PEMEX’s financial position weren’t enough to avoid a two-notch downgrade by a rating agency. The government then announced that it is planning additional measures to support the state-owned company. We expect economic activity to slow to 1.7% this year (from a preliminary estimate of 2.0% in 2018) as uncertainty still hangs over domestic policy direction and approval of USMCA by the U.S. Congress. Deceleration in the U.S. economy will also curb growth. We expect Banxico to keep the policy rate unchanged throughout this year. However, considering the high level of uncertainty over domestic policy direction and over the approval of the USMCA in the U.S. congress, we continue to think that rate hikes this year are more likely than cuts.
** Full story here.

Day ahead: The Statistics Institute (INEGI) will announce November’s gross fixed investment at 12:00 PM (SP Time), which we expect to decrease 0.5% yoy (from 3.4% in October). 


In the minutes of the January monetary policy meeting, the board appears comfortable with the inflation outlook while rising external risks are a concern. Overall, the board seems comfortable with the current mild expansionary level of the policy rate, signaling that under the current conditions there is no need to start the normalization cycle.

We believe that the central bank will maintain its holding pattern for the time being and begin a modest hiking cycle only in 2H19. The unanimous decision, still-incipient activity recovery, risky global scenario and better-behaved inflation suggest there is no need for rate hikes in the near term.  The next monetary policy decision will take place on March 29.
** Full story here.


Low oil prices aided a hefty trade surplus at the start of the year. The trade surplus came in at USD 1.0 billion in January, broadly in line with the market consensus but larger than our USD 750 million call. Weak consumption-related imports also helped, while capital imports are robust and in line with other indicators that show solid investment. Export growth is mild, still hampered by falling mining exports. The rolling 12-month trade surplus was USD 5.3 billion surplus (USD 5.4 billion in 2018, USD 7.9 billion in 2017). Our seasonally adjusted series shows a similar USD 5.6 billion (annualized) trade surplus in the quarter ended in January, improving from USD 4.0 billion in 4Q18 and USD 4.8 billion in 3Q18, as energy and capital imports moderated at the margin.

We expect the current account deficit to remain broadly stable from last year, contained by low oil prices. We estimate a deficit of 2.7% of GDP for this year, an increase from the 1.5% deficit recorded in 2017.
** Full story here.

Wage growth in December was 3.8% yoy (4.0% previously), while real wages grew a stable 1.2%. As a result, in the final quarter of 2018, nominal wage growth 4.0%, stable from 3Q18, but still below the 4.5% in 2Q18. Accordingly, real wages in the quarter rose 1.2%, stable from 3Q18, while also below the 2.5% in 2Q18. Overall, the real wage bill (considering only salaried employment), grew 2.5% in the quarter (3.0% in 3Q18, 4.8% in 2Q18 and 6.0% in 1Q18). Complementary sources of information for the labor market (capturing formal employment) that the central bank monitors show rising wage growth. The average income of pension contributors average incomes are growing at a brisk pace (5.5% for the quarter ending in November, 4.8% in 3Q18), while preliminary data captured by the Labor Ministry (SIL) shows growth of 6.8% in the quarter ending in October (5.6% in 3Q18 and 4.6% in 2Q18). The central bank has highlighted the impact immigration has had on employment, partly explaining lower wage pressures, but overall sees a labor market evolving in-line with the growth pace observed since mid-2017.

Day ahead: January’s inflation will be released at 9:00 AM (SP Time). High frequency price tracking points to consumer prices rising 0.1% from December (0.5% estimated for the new basket for January 2018).


Day ahead: January’s IPCA inflation will be released at 9:00 AM (SP Time). We forecast a 0.37% monthly increase, leading the 12-month reading to 3.83% (from 3.75% in December).

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