Itaú BBA - MEXICO – Banxico cuts the policy rate by 25-bps, as expected; Two board members vote for a 50-bp cut

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MEXICO – Banxico cuts the policy rate by 25-bps, as expected; Two board members vote for a 50-bp cut

September 26, 2019

The probability of a lower policy rate than that we currently forecast is increasing.

As widely expected, Mexico’s central bank reduced its policy rate by 25-bps in its September meeting. However, two board members (out of 5) voted for a larger 50-bp rate cut. Despite the dissenting votes, the statement kept the same tone from the previous one, meaning that the central bank is still cautious on the inflation outlook and on the balance of risks for inflation. 

As in the previous statement, the central bank reaffirms that “marked uncertainty persists over the risks for inflation”.  In our view this is a wording the central bank has been using to accommodate the varying views within the board on the balance of risks for inflation. The list of upside and downside risks hasn’t changed from the previous decision too. 

The assessment of activity is also unchanged. The central bank states that it expects a recovery in the months before the end of the year, while the balance of risks for activity continues to be tilted to the downside. 

In its concluding remarks, the central bank continues to list (in the same order as before) the pass-through from exchange-rate, the relative policy stance between Mexico and the U.S. and the evolution of output gap as the relevant factors to be monitored ahead.  

The fact that two board members are already backing a pace acceleration of the easing cycle together with the poor activity numbers increases the probability that the policy rate will end this year below our current forecast (7.25%, through two additional 25-bp rate cuts in the remaining meetings of the year). We expect the minutes of the meeting to indicate that a more clear deceleration of core inflation is a necessary condition to convince the majority of the board to front-load the cycle. While lower core inflation ahead is very likely – given the recent behavior of the currency, a more favorable inertia (lower headline inflation) and the negative and widening output gap – the timing for the turning point of core is uncertain.

João Pedro Resende
Julio Ruiz

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