Itaú BBA - MEXICO – Banxico minutes: further (limited) easing contingent on data

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MEXICO – Banxico minutes: further (limited) easing contingent on data

August 27, 2020

While two members advocated for further easing, other two seem more cautious

The central bank of Mexico (Banxico) published the minutes of August 13 meeting, in which the majority of Board members decided to cut the policy rate by 50-bp (to reach a rate of 4.50%). The minutes showed Irene Espinoza was the dissenting vote (backing a 25-bp cut), arguing less easing room due to the persistence in inflation, an increase in inflation expectations and higher capital outflows in Mexico relative to other emerging market economies.  

While some board members backing a 50-bp move are clearly more cautious, additional easing is not ruled out. One Board member considered important to continue with the easing cycle, without discarding the possibility of reaching a real rate close to zero or even negative. In turn, other member added that the economic crisis demand continuing decisively with the accommodative cycle. However, the pace at which the cycle’s end point is reached is key to prevent undesirable monetary policy reversions. In that sense, the terminal reference rate and its trajectory will be data dependent. Another member was more conservative adding that the margin for additional reductions, if existent at all, would be significant 
narrower and will be data dependent

Lower disagreement over the balance of risk for inflation (relative to past minutes). Most members agree on an uncertain balance of risk for inflation. While some board members agree on a greater than expected impact of the negative output gap on inflation, some members pointed out the possibility of additional episodes of foreign exchange depreciation. In addition, some members highlighted the risk of a de-anchoring of inflation expectations.

Our base case is for Banxico to deliver a 25-bp rate cut in the next monetary policy meeting (September 24). However, in our view, a further deterioration of inflation (there are two additional releases until the next policy announcement) could lead most Board members to back a pause in the easing cycle already in the next meeting. This is consistent with the guidance provided recently, in which the board conditions the space for further easing on data. 

Joao Pedro Resende
Julio Ruiz

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