Itaú BBA - MEXICO – Banxico Minutes: Most board members still worried with the inflation outlook

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MEXICO – Banxico Minutes: Most board members still worried with the inflation outlook

April 11, 2019

However, deputy governor Esquivel advocated for a more neutral tone in the policy statement.

The central bank of Mexico (Banxico) published the minutes of March’s meeting, held two weeks ago, when board members voted unanimously to leave the policy rate unchanged at 8.25%. However, deputy governor Gerardo Esquivel, expressed a dissident opinion of the policy statement tone, which he believes shouldn’t have been restrictive. He considered that the recent evolution of several inflation indicators and the looser Fed’s stance opened up space for a more neutral tone. Moreover, he considers that downside risks to inflation (due to greater economic activity slack) are high enough as to balance the potential upward risks (his assessment of the effect on inflation of the minimum wage hike and pass through are smaller than the monetary policy statement reflected).     

However, most board members expressed their concern about the persistence in core inflation.  One member mentioned that despite monetary policy being restrictive in early 2018, the path of core inflation foreseen by economic analyst is markedly above Banxico’s forecast path. Another member noted that given the persistence of a situation of high uncertainty and upside risks to inflation, monetary policy must continue to be prudent. In this sense, the member was surprised about a generalized forecast of an easing of monetary policy, in a context in which short and long- term inflation expectations are above the 3% target.

Slack conditions in the economy are expected to widen over the next quarters by most members, with one board member advocating to adjust down rates in the short term. One board member considered that keeping a tight monetary policy could eventually contribute to generate undesired downward pressures on economic activity. The same member concluded (according to his view) that given that the balance of risk for growth is clearly biased to the downside, that the level of interest rate is consistent with the convergence of inflation to Banxico’s target and depending on how inflation behaves in the coming weeks, room to begin a downward adjustment in the policy rate could be created in the near future.    

We expect  Banxico to deliver two 25-bp rate cuts in the last quarter of 2019. Rate cuts are not expected in the short term given the central bank’s belief (most board members) that the balance of risks for inflation remains tilted to the upside. Looking forward, we believe that with inflation falling further 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 the risks for inflation fall.

João Pedro Resende
Julio Ruiz

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