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Stable rates in Mexico

May 17, 2019

The Board sees the recent high in inflation as transitory, and believes its policy stance is consistent with the convergence of inflation to its target.

Talk of the Day


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. The Board recognizes the recent acceleration in inflation as transitory (associated to a price rise of tourism services and airfares due to Easter holidays), and believes the current policy stance is consistent with the convergence of inflation to its target within the time-frame in which monetary policy operates.

The balance of risks for inflation continues to be tilted to the upside. Although there has been an intensification of certain downside risk factors, like the greater economic slack or lower price increases in some non-core items, there are other factors that could deviate inflation from Banxico’s foreseen path. The Board is still worried about persistence in core inflation, in addition of internal and external factors pressuring the exchange rate (and in turn inflation), the effect of the minimum wage hike in overall wage revisions (if they exceed productivity gains, which they acknowledged that in some sectors have exceeded productivity gains and could give rise to cost pressures), a deterioration of public finances and a new risk was included: that the greater slack in the economy doesn’t translate into lesser inflation pressures. For economic activity, the balance of risk is tilted to the downside and has become more uncertain. The economy weakness observed since the 4Q18 has intensified in the 1Q19 due to external and domestic factors (some of which are transitory).

We expect Banxico to deliver two 25-bp rate cuts in the last quarter of 2019. Rate cuts in the short term are not expected, given that Banxico’s inflation balance of risks continues to be tilted to the upside (although they recognized downside risks to inflation have intensified). Looking forward, we believe that in a scenario with inflation falling within the central bank’s target range, below-potential growth, and a looser monetary-policy stance by the Fed, the central bank will have room to start a gradual normalization cycle, as long as uncertainty abates and risks for inflation fall.
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Analysts postpone timing of expected rate hike, according to the central bank’s monthly analyst survey. The inflation expectations for 2019 edged up to 3.38% (3.28% previously; our call: 3.2%), following the upside surprise in April. The 1-year inflation outlook remained stable at 3.27%, while the 2-year inflation expectation ticked up to 3.18% (3.16% previously). Expectations for core inflation (excluding food prices) moved to 3.18% for a 1-year horizon (3.06% in April), while for the 2-year vision remained close to the 3.0% target at 3.08%. On the monetary policy front, analysts still foresee one rate increase this year in October, while the second hike was postponed by one month to April 2020. We expect the board to keep the policy rate unchanged at 4.25% throughout our forecast horizon, as inflation remains controlled, while the output gap is wide and the external scenario remains risky. The next monetary policy meeting will be held on June 21.

Day Ahead: April’s consumer confidence will be published. According to think-tank Fedesarrollo, consumer confidence returned to optimistic ground in March after a semester of pessimism. Low inflation and the mildly expansionary monetary policy would likely keep confidence upbeat.


Macro Vision: The weakness of economic activity, in a context of historically low interest rates, has fueled a debate about the power of monetary policy. We see evidence that its power increased significantly in recent years, as the relevance of subsidized credit receded. In other words, monetary policy is now affecting the economy more effectively than in the past. According to our analysis, the economy has not been growing at stronger rates because it is facing unfavorable developments on the demand side, and the current interest rate (2.8% in real terms) is still higher than the level required for the economy to grow faster.
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