Itaú BBA - MEXICO – Monetary policy decision: On-hold, as expected. Rate moves are unlikely anytime soon

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MEXICO – Monetary policy decision: On-hold, as expected. Rate moves are unlikely anytime soon

February 7, 2019

We now expect the central bank to keep the policy rate unchanged throughout this year

Banco de Mexico (Banxico) board members voted unanimously to leave the policy rate unchanged at 8.25%, in line with our expectations and market analysts. In the statement, the central bank indicates that the bar for additional rate hikes is higher now, but an easing cycle is unlikely anytime soon as the central bank remains cautious. 

The statement suggests additional hikes are unlikely. In the press release announcing the decision, the central bank mentions that the level of policy rate is consistent with meeting the target in the relevant policy horizon. At the same time, the board acknowledges some more positive developments on the domestic political front (the successful renegotiation with the airport bondholders and the 2019 budget), a more helpful external environment for the inflation outlook (weaker global growth and a looser monetary policy stance by the Fed) and mentions the GDP deceleration registered in the 4Q18 (classifying it as significant). In this context, although the central bank still mentions that it is ready to take actions necessary to bring inflation to the target in the relevant horizon, it no longer mentioned the possibility of strengthening the monetary policy stance (that is, hiking the policy rate further) when referring to those actions.

Still, the central bank remains cautious, so an easing cycle is also unlikely anytime soon. The balance of risks for inflation is still tilted to the upside, according to the statement, and the board continues to be worried about the stickiness in core inflation (so the board didn’t take comfort with the most recent CPI releases, which surprised markets to the downside). 

We now expect the central bank to keep the policy rate unchanged throughout this year. Previously we were expecting one additional 25-bp interest rate hike. Still, considering the high level of uncertainty over domestic policy direction and over the approval of the USMCA in the U.S. congress, we continue to think that rate hikes this year are more likely than cuts.

Julio Ruiz



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