Itaú BBA - MEXICO – Banxico minutes: the easing cycle will likely resume soon, but there are risks

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MEXICO – Banxico minutes: the easing cycle will likely resume soon, but there are risks

January 7, 2021

Deputy Governor Heath and Esquivel were the dissenting votes.

The monetary policy minutes of the last monetary policy decision of 2020, in which the majority of board members voted for keeping the policy rate unchanged at 4.25%, revealed deputy governors Jonathan Heath and Gerardo Esquivel were the dissident votes (both backing a 25-bp rate cut).  Both dissenting members argued the amount of slack in the economy, the appreciation of the peso, decline of country risk perception and the slowdown in inflation supported lowering the policy rate. 

Further rate cuts will be data dependent. Three members argued (one of them likely being Guzman, which won’t be in the board this year) that further rate cuts should be data dependent and that the pause provides a greater clarity for the convergence of inflation to its target. One of these members, noted that prevailing uncertainty does not allow for the provision of an accurate forward guidance. 

Most members also emphasized the role of financial conditions in the monetary policy outlook, highlighting the uncertainty from the recent initiative to Banxico law which would oblige the central bank to buy USD’s in cash. One member highlighted that monetary policy must contribute to foster financial stability and that authorities should avoid taking measures that might jeopardize macroeconomic stability such as the recent reform to Banxico law. Other two members linked the potential approval of the initiative to possible currency depreciation episodes and thus affecting the monetary policy stance. 

Our base case is for Banxico to resume cutting its policy rate in February with a 25-bp rate cut, assuming benign financial conditions and well-behaved inflation (supported by a wide negative output gap and exchange rate strengthening). However, uncertainty from the legislative regarding Banxico’s law could stand in the way of further rate cuts, besides potential upside inflation surprises. 

Julio Ruiz
​​​​​​​Joao Pedro Resende

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