Itaú BBA - MEXICO – Monetary Policy Decision: further rate cuts likely in the near term

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MEXICO – Monetary Policy Decision: further rate cuts likely in the near term

December 17, 2020

We expect Banxico to resume cutting the policy rate as soon as 1Q21.

Banco de Mexico (Banxico) kept its policy rate unchanged at 4.25% in line with our forecast and market expectations (as per Bloomberg). The decision wasn’t unanimous as two board members voted for lowering the policy rate in 25 bps. 

As in the previous monetary policy decision, the statement mentions explicitly this is a pause in the easing cycle to provide the necessary room to confirm that the trajectory of inflation converges to the target. Further monetary policy decisions will depend on the evolution of inflation and its determinants. 

The balance of risks for inflation is still described as uncertain. Additional foreign exchange appreciation and the mention of the persistence in the reduction of prices due to the “Buen Fin” (Mexico’s black Friday) effect were added to the list of downside risks for inflation (also include a wider negative output gap, retightening of social distancing measures and lower inflation worldwide). In turn, upside risks for inflation list still mentions the depreciation of the currency and several cost-related pressure for firms but added core inflation pressure generated by the recomposition of spending towards merchandise. 

We expect Banxico to resume the easing cycle in the next policy decision (we expect three 25-bp consecutive rate cuts during the first half of the year), assuming stronger currency, a still wide negative output gap that would lead to lower inflation (higher annual inflation is expected in 2Q21 but due to an unfavorable base effect, reflecting temporary low energy prices in 2Q20). 

Joao Pedro Resende
Julio Ruiz

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