Itaú BBA - MEXICO – Banxico Minutes: a still cautious forward guidance

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MEXICO – Banxico Minutes: a still cautious forward guidance

October 10, 2019

The acceleration of the easing cycle will depend on the favorable evolution of core inflation

The central bank of Mexico (Banxico) published the minutes of September’s meeting, held two weeks ago, when three out of five members voted to cut the policy rate 25-bp (to reach a rate of 7.75%). The minutes revealed deputy governors Jonathan Heath and Gerardo Esquivel voted for a larger rate cut (50-bp). Esquivel argued that core and headline inflation which are expected to converge to the target, a widespread reduction of global interest rates and weakness in the economy opens space for a larger cut, while Heath argued that there is room to lower the rate further and still keep a restrictive monetary policy stance. However, one of this members (probably Jonathan Heath) warned that the monetary policy adjustment pace will have to weigh the risks to core inflation. 

Board members who voted for a 25-bp cut seem cautious over accelerating the easing pace in the short term. The majority of board members highlighted that maintaining a prudent monetary policy stance is necessary given the uncertain scenario that inflation faces. However, one of these members delivered a more balanced speech, noting that Fed rate cuts and weakness in the economy (which should be reflected in the evolution of prices) opens space for easing monetary policy, while the persistence in core inflation, above target inflation expectations (beyond short-term measures) and the recent increase in the sovereign risk imply that it is difficult to determine a cycle for monetary policy. The same member added that monetary policy must respond to incoming data.

The minutes showed a still-divided board over the balance of risks for inflation. One member deemed the balance of risk for inflation difficult to evaluate given the atypical behavior of the non-core component, while other member mentioned it remained biased to the upside. In turn, some members pointed out that the risks for inflation have decreased, with one of them viewing the balance of risks tilted to the downside. Meanwhile, the majority of board members expect core inflation to start to decelerate as the indirect effect from energy prices starts to fade away and the output gap curbs demand-side pressures. 

We expect another 25-bp rate cut in November. However, considering the weakness of the economy, we do not rule out that the majority of the board will opt for a larger 50-bp rate cut if core inflation readings available until the meeting shows a slowdown.   

João Pedro Resende
Julio Ruiz

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