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MEXICO – Monetary Policy Decision: an expected 25-bp rate cut before an easing cycle pause

September 24, 2020

Further monetary easing unlikely at least until the end of this year.


​​​​​Banco de Mexico (Banxico) board members voted unanimously to cut  the policy rate by 25-bp (bringing it to 4.25%) in line with our forecast and market expectation (as per Bloomberg). 

Banxico seems to be signaling a pause in its easing cycle. According to the statement, the 25-bp rate cut decision was taken under a narrow room for maneuver. Furthermore the term “available room for maneuver” in its monetary policy forward guidance sentence was omitted. The current statement instead pointed out that “Monetary policy implementation will depend on the evolution of the factors that have an incidence on the outlook for inflation and its expectations, including the effects that the pandemic might have on both factors”. In the previous statement, the board said instead: “Looking ahead, the available room for maneuver will depend on the evolution of the factors that have an incidence on the outlook for inflation and its expectations, including the effects that the pandemic might have on both factors.”

The balance of risks for inflation continues to be labeled as uncertain. Compared to the 2Q inflation report, the statement keeps mentioning as downside risks for inflation the widening of the negative output gap, social distancing measures reducing demand for certain services and downward inflationary pressure worldwide, but the downside risks associated to an appreciation of the currency and a reversion of the recent increase in energy prices were dropped. Regarding upside risks for inflation, the statement mentions the depreciation of the currency, high persistence of core inflation and supply/demand shocks amid sanitary measures, but “higher increases in energy prices” was dropped from the list (compared to 2Q inflation report also). 

The Board expects ample slack conditions to remain. While the board noted economic activity started to recovery in June and July, an environment of uncertainty and downside risks to GDP prevails. 

We expect Banxico to pause its easing cycle keeping the policy rate at 4.25% end of year 2020.  Looking ahead, we expect Banxico to resume cutting the policy rate next year (we expect a year end level of 3.50%), assuming inflation decelerates amid a stronger currency and a still-wide output gap.

Joao Pedro Resende 
Julio Ruiz 

 



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