Itaú BBA - MEXICO – Banxico minutes: not the end of the easing cycle

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MEXICO – Banxico minutes: not the end of the easing cycle

November 26, 2020

Deputy Governor Jonathan Heath was the dissenting vote.

The minutes of the most recent monetary policy decision of Mexico, in which the majority of Board Members voted for keeping the policy rate unchanged at 4.25%, revealed deputy governor Jonathan Heath was the dissident vote (calling for a 25-bp rate cut). The dissident voter argued that the Board shouldn’t overreact to inflation being temporarily above the upper bound of the range around the inflation target given the magnitude of the economic collapse and the difficulty of implementing a greater fiscal stimulus. He added that a pause in the easing cycle is not acceptable when a sensitive inflation decline is expected in the first half of November (already realized) due to the fall in energy and non-core food prices and downside pressure from Mexico’s black Friday (yesterday the inflation report noted it is still too difficult to evaluate the persistence of said shock).

The minutes reinforce the decision to hold rates is a pause, while two Board members (one being Jonathan Heath) emphasized the decision should not be seen as the end of the easing cycle. One Board member noted that the ex-ante real interest rate is still high relative to that observed during the 2009 financial crisis, when the output gap was narrower than currently and inflation expectations were higher. Meanwhile, another member argued that inflation lies in the foreseen trajectory and that output gap will remain very negative for a long period, which gives room to continue the current easing cycle.

Some Board members emphasized the role of financial conditions, suggesting that inflation data is not the only variable that will be monitored by the board ahead. One board member noted that financial markets must act properly in order to have an orderly adjustment of the economy and maintain a low inflation, while another member said that it is time to make a pause in the easing cycle which is consistent given the significant global and domestic uncertainty. This same member noted that monetary policy should be cautious amid the sensitivity of capital outflows to the policy rate in Mexico. 

We expect Banxico to resume the easing cycle as soon as 1Q21 (we see three additional 25-bp rate cuts during the first half of 2021). However, given the strong performance of the Mexican peso and lower-than-expected inflation (albeit linked to one-off factors), we can´t rule out that the central bank will reinitiate the cycle already next month.  

Joao Pedro Resende
Julio Ruiz

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