Itaú BBA - MEXICO – Monetary Policy Decision: a pause, not the end of the easing cycle

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MEXICO – Monetary Policy Decision: a pause, not the end of the easing cycle

November 12, 2020

We expect Banxico to resume the easing cycle next year.

Banco de Mexico (Banxico) kept its policy rate unchanged at 4.25% in line with our forecast and above market expectations (4.00%, as per Bloomberg). The decision wasn’t unanimous as one board member voted for lowering the policy rate in 25 bps. The minutes of the previous meeting had suggested that at least two board members would vote for another cut this month.  

The statement mentions explicitly the decision is a pause in the easing cycle, pointing out that it “provides the necessary room to confirm that the trajectory of inflation converges to the target”.  In our view, this supports our call of further rates cuts next year once inflation is in a clearer downward trend. 

The board acknowledged a slight increase in the foreseen inflation trajectories in the short term (still the board expects inflation to converge in the next 12-24 months to 3%), while keeping the balance of risk for inflation as uncertain. Compared to the previous monetary policy statement, the list of upside (foreign exchange depreciation, persistence of core inflation and upward pressure from logistical problems and costs associated to the outbreak) and downside (a wider negative output gap, lower inflationary pressure worldwide and downward demand pressure from tighter social distancing measures) risks for inflation remained unchanged. 

We expect Banxico to keep its policy rate unchanged at 4.25% in the last monetary policy meeting of the year (December 17) amid high inflation. Next year, we expect Banxico to resume cutting the policy rate (we expect a year end level of 3.50%), assuming inflation decelerates amid a stronger currency (benefited by the more constructive external environment) and a still-wide output gap.

Joao Pedro Resende
Julio Ruiz

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